There are indications that may change in the next fiscal. If the stockmarket's hopes prove correct, and liquidity flows into the markets because of the tax concessions given to mutual funds, the lowering of the capital gains tax rate, and the lifting of the shadow of UTI selling, then there could well be a diversion of funds from banks to bourses. At the very least, the rate of increase in bank deposits could slow down. If that happens, liquidity may not be sufficient to finance government borrowing, particularly if, as is very likely, the unrealistic targets for government expenditure are overshot. In that case, interest rates could well jump right back. And what would happen if the long-awaited recovery in the economy occurs? That would constrain the resources of banks even further. Apart from extra funds which would be pre-empted by credit to the commercial sector, more currency would be held for transaction purposes, which would also result in a lower rate of incremental deposits.

However, given the fact that such lowering of rates has been unsuccessful in sparking a recovery in the past, the RBI need have no reasons for concern on that score. And since credit growth is negative during the first five or six months of the fiscal year, the government should have no difficulty in pushing through its borrowing programme cheaply.