Finance minister Yashwant Sinha had, after presenting the last Budget, publicly requested the RBI to ease interest rates. An obliging RBI found the rupee sliding vis-a-vis the dollar; low-cost funds were used to speculate against the rupee. The RBI launched damage control measures to prevent the exchange rate from going into a tail-spin.

True, the net depreciation of the rupee (in conjunction with the revival of East Asian demand for imports) saw India's exports bounce. But the cut-back in interest rates did not boost domestic investment. (Also, there is little evidence of the rise in export growth having driven up investment in export oriented production).

The moral is: while high interest rates may deter investment, low interest rates by themselves do not inspire an investment boom. It is only when expectations favour investment, or when capacity constraints retard supply expansion in the face of unsatisfied demand, that low interest rates rev up investment.

It is difficult to gauge the extent of productive capacity utilisation across the board. But the output slack, inter alia, in automobiles and cement is an ominous pointer to inadequate capacity utilisation. Besides, there is apprehension about import competition following the removal of quantitative restrictions in the next fiscal. This will open the door to a variety of consumer goods from abroad. Investors are not exactly raring to go.

Thus, it seems interest rate cuts will not revive investment. However, if this were to happen, industry should be able to pare its interest costs; that by itself will be a gain. So, should the RBI seek to soften interest rates? Governor Bimal Jalan seems to think so, but he is quick to add that the RBI has really no say in the matter since it has deregulated interest rates.

This is the reason why the RBI is being pressed to reduce the bank rate; that would be a strong signal to the banks to take consequential action. But Dr Jalan's point is that the bank rate is currently on a par with the (fairly high) nominal rate of inflation.

Should the banks bring down lending rates on their own in order to boost the demand for funds? The trouble is that banks, burdened with non-performing assets (NPAs), have to provide for NPAs from out of their earnings from loans: the larger the proportion of NPAs in bank lending, the higher is their average lending rate. Understandably, banks fight shy of new loans at lower interest rates. They prefer to put their funds into zero-risk government paper.

The low interest route to cost-reliefs and investment boost seems barred in the foreseeable future. Monetary policy is slated to take a back-seat. The initiative lies in the domain of fiscal policy: direct and indirect tax reliefs coupled with stiff import duties; and, of course, larger public investment.