This fact of indifferent industrial performance did influence the conduct of the now autonomous central bank. In the initial years of liberalisation, the battle against inflation was the RBI's principal concern. But this battle was soon won without much effort. After the initial period of monetary stringency that accompanied IMF-style adjustment, the RBI itself was hard put to curb money supply growth which its monetarist faith suggested was the key to reducing inflation. In fact, as Chart 5 shows, broad money grew by over 19 per cent a year during the first half of the 1990s. This was partly because, even while a fall in credit to the government limited the rise in the central bank's assets, the inflow of dollars into India's liberalised financial markets was forcing the RBI to demand and buy dollars in order to prevent an appreciation of the increasingly market-determined value of the rupee. As Chart 8 shows capital inflows rose sharply to more than $.8.5 billion in 1993-94 and 1994-95. This rise was clearly on account of large inflows of portfolio investments (Table 1), in response to which the RBI had to purchase dollars to prevent an appreciation of the rupee. In the event, the foreign currency assets of the central bank tended to rise, increasing the high-powered money base and therefore the level of money supply. But this did not defeat the RBI's drive to keep inflation under control, since the liberalisation of imports in the context of a decline in inflation worldwide and the reduction in the expansionary stimulus provided by government spending was in itself contributing to a dampening of inflation.
Table 1 >>
 
With inflation proving to be less of a problem, the RBI shifted the focus of its policy to growth. Since financial reform required a further curtailment of an expansionary stimulus provided by government spending, the only instrument that seemed to be available to spur industrial growth was a reduction in interest rates. However, nominal interest rates in the system had reached extremely high levels in the wake of reform. And this high rate of interest persisted even as access to liquidity in the system was eased as a result of the rising foreign currency reserves. There was one obvious reason why interest rates were sticky downwards. This was the high floor that risk free government bonds provided to the structure of interest rates. With the government deprived of access to cheap funds from the mint as a result of the curb on the issue of ad hoc Treasury Bills, it had to finance its persisting fiscal deficits by borrowing from the open market at market-determined rates. Once the banks had met their statutorily required investment levels in government securities, government bonds could be placed in the market only if the interest rates on such investment offered a good enough spread to the banks relative to the deposit rates paid by them. Given the relative high interest rates that depositors could obtain from other investments in other savings instruments like National Savings Certificates and Provident Funds and in more risky holdings of equity, deposit rates had to be kept relatively high to attract funds into the banking system. This meant that the interest rates offered on government bonds had to remain high as well. Since these were virtually risk-free investments, carrying as they do a sovereign guarantee, these relatively high interest rates on government bonds defined the floor to the structure of interest rates which at one time stretched to maximum levels of well above 20 per cent.
 
Faced with this situation and given its resolve to bring down interest rates, the RBI moved in four directions. First, it relaxed controls on interest rates on deposits, giving banks the flexibility to reduce them on longer term deposits and raise them on short-term deposits, so as to reduce their average interest costs without curbing deposit growth. Second, it substantially enhanced liquidity in the system by systematically bringing down the cash reserve ratio and releasing funds to be provided as credit by the banks. Third, it reduced by as much as 4 percentage points the Bank Rate, which is the rate at which banks can obtain finance from the central bank and therefore serves as an indicative rate for the market for funds. And finally, it colluded with the government in its effort to bring down the rate of interest on small savings instruments and provident funds, so as to encourage households investments in market instruments as well as to reduce the interest burden of the government which is the principal borrower of funds invested through those channels.
 
This combination of initiatives has indeed been successful in bringing down interest rates, making the now autonomous central bank appear doubly successful. It could claim success in dampening inflation and it could be satisfied with the results of its joint effort with the government to bring down interest rates. However, the objective behind the drive to reduce interest rates, namely, that of stimulating industrial growth remains unrealised. After a temporary reprieve during 1999-2000, the industrial sector is back to the sluggish performance recorded since 1997-98. And even during 1999-2000, the recovery in growth does not seem to have stimulated investment. It is this factor which possibly explains the slower growth of commercial credit and money supply during that year. The reason industrial sluggishness is, of course, the lack of any expansionary stimulus. While government expenditure net of interest payments is down relative to GDP, exports which were to provide the new engine of growth in the wake of reform have remained at disappointing levels.