One can, for example, justifiably claim that high real interest rates should not be the basis for lowering prime lending rates (PLR); one can question whether inflation is really falling (WPI is down to 1.62 per cent year-on-year) or merely appearing to fall for statistical reasons; one can say that consumer prices are not really down, and that the WPI does not capture true inflation at the retail end; one can argue that in India lending rates cannot be cut unless deposit rates are too; moreover, if one cuts deposit rates, the savings rate can take a tumble, with deleterious consequences for the economy. When no argument works, one can use the clincher: even if interest rates are cut, corporates won't benefit since the best corporates are already borrowing below PLR, and the rest are not worth lending to anyway. The unbeatable argument takes the battle to the moral ground: any cut in interest rates will only benefit the government, which should be prevented from doing so since it is already into a debt trap.With so many reasons being adduced for not doing the right thing now (i.e. cut lending rates), it is worth examining their validity. According to me, most of them are fallacious, disingenuous, or irrelevant. The few reasons that are relevant are underwhelmingly so. Let's take them one by one.

Argument No 1: High real interest rates are no reason to lower nominal ones. This is absolute rubbish. If real rates are continuously high-and we are not talking about high short-term rates-they can destroy the competitiveness of Indian business. In this scenario, any monetary authority worth its salt should be looking for reasons to cut interest costs, not the other way round. And if low inflation rates are not reason enough, there is no way real interest rates can ever be cut to competitive levels.

Argument No 2: Inflation is not really falling now; it is merely a statistical quirk since the WPI was too high last year. This is true-up to a point. But the argument cuts both ways; if high inflation was reason enough for a monetary tightening in the mid-1990s, why shouldn't low inflation as measured by the same indices be reason for doing the opposite now?

Argument No 3: The WPI is a statistical lie; consumer prices are not really down. In truth, even the consumer price index is expected to fall to around three to four per cent by October. Moreover, what is the evidence that hits one in the eye everywhere? Food prices are stable or falling; prices of textiles are declining; and real estate prices are down. That accounts for roti, kapda aur makaan. Moreover, price wars are rampant in all major consumer products--from TVs to fridges to cars. If the current industrial revival sustains, this may change, but one thing is certain: in the era of low trade barriers, no manufacturer can raise prices at will. In fact, I suspect that barring supply-related glitches in items with inelastic demand (like food staples), Indian inflation has permanently moved to a lower trajectory of 4-6 per cent.

Argument No 4: Cutting lending rates means cutting deposit rates. And cutting deposit rates means affecting the savings rate. This argument is interesting, but not quite gripping. First of all, the term "savings" is not coterminous with bank deposits. If bank deposit rates are not lucrative, people may move to other financial or real assets, including stocks, mutual funds, real estate or gold. But a lowering of returns in one area of savings (bank deposits) will not automatically reduce the savings rate, though it may change the composition of household or corporate savings. I might move my money from bank deposits to money market funds with chequing facility; some others may even save more to ensure that their monthly returns from financial assets remain the same. UTI's monthly income schemes continue to draw huge funds even though returns have been cut in recent years.

Argument No 5: Corporates won't benefit even if interest rates are cut since banks are already lending below PLR. This, once again, is a load of rubbish. If money is eased, Triple A corporates will get commercial paper and debentures even cheaper; and since banks have to lower the top rate every time they cut PLR, there will be a general reduction in interest costs for all borrowers. The real caveat one must issue is that all this will affect banks' profitability-and this is what the RBI must worry about when it thinks of cutting rates. I believe the problem can be easily addressed, provided one thinks unconventionally. Here's one solution: to compensate banks for the cut in interest rates, the RBI should immediately cut CRR (now 9.5 per cent) to three per cent; the 6.5 per cent CRR cut will free Rs 30,000-35,000 crore that is currently earning banks only around four per cent.

This liquidity will find a problem of inadequate investment opportunities in the short run-for which I have an answer. The RBI can introduce a new short-term (maybe for one year) additional SLR called Triple A liquidity ratio (TLR) of five or six per cent, which banks can use for investment in the bonds or other debt instruments floated by any Triple A-rated corporate. This will not only compensate banks for any immediate cut in PLR, but also save government from the moral hazard of borrowing cheap.

So where's the catch? The catch is that the government will earn less from the RBI, which uses its cheap CRR funds to generate profits for the government. The truth is, the CRR is just a disguised form of SLR. The profits from these cheap funds initially go into the RBI's kitty, from where the government hijacks them.

Seen in this light, I believe that a two percentage points cut in PLR is eminently feasible in the short term (meaning, right now).

The situation can always be reviewed in next year's busy season credit policy, if inflation or money supply get out of control. The RBI should stop fighting yesterday's wars today and facilitate a PLR cut immediately.