On the face of it, a decline in inflation to two per cent or less is cause for celebration. However, the fact is that the price indices measure change over the high prices prevailing in 1998-99. This year's low inflation means that prices are not rising the way they did last year, but the absolute level of prices is high.

Is this sufficient reason to bring down interest rates? What if the year closes with an average (of 52 weeks) inflation of five per cent or somewhat more? The Reserve Bank has woven the assumption of 4-6 per cent inflation into its monetary policy; and this was the reason why it signalled a decline in the prime to thecurrent 12 per cent level. For a fresh reduction, the RBI must assume with reasonable certainty that the low inflation will hold through 1999-00. But there is no knowing how seasonal supplies will fluctuate, notably of agricultural output.

This is not to say that the case for a cut in interest rates is weak. Industrial production has risen 6.3 per cent in April-May and production (therefore demand for) of capital goods and durable consumer goods is strong. These are pointers to a revival of the industrial economy.

An interest rate reduction could provide a fillip to investment demand and accelerate revival. The current low inflation provides a cushion against overheating the economy. Yes, there will be some rise in prices, possibly of manufactures. That will not be a bad thing if agricultural prices are held around current levels.

The rupee is stable, and foreign currency reserves are growing at a respectable pace (but the fly in the ointment are high oil import prices). If the RBI is to opt for growth,the time for it is now.

It is difficult to say if the RBI will act on interest rates by bringing down the cash reserve ratio (CRR) of banks. Such a step would force the banks to lower lending interest rates. But would there be a consequent rise in the demand for funds? Corporates need equity to rev debt; and the primary market has yet to be infected by the enthusiasm of the secondary markets.

Besides,a lower CRR will necessarily bring down bank interest rates on term deposits. The trouble is that the growth of time deposits of banks, net of proceeds from Resurgent India Bonds, has fallen in the financial year so far. A cut in deposit interest rates could lead to a flight from the banks. For now, the RBI should hold its horses.