Judging by the strange silence on the subject, no one, not even superannuated souls over 60 managing the op-ed pages of news-dailies seems to give a damn that the real interest rate, as this sentence is being written, has turned negative. That's right, negative, as in minus, below zero. Today, the return on deposits (with a maturity of more than a year) at commercial banks is between 5.25 per cent and 6 per cent. The yield on 10-year G-secs (government securities) is around 5.8 per cent. With inflation (based on the Wholesale Price Index) hovering just below the 6 per cent mark, it doesn't take a John Nash to figure out that the real interest rate is negative.

Attribute the phenomenon to India's desire to be in step with the rest of the world, an economic sentiment respected by the country's central bank, Reserve Bank of India. In the six years between 1997 and 2003, RBI has slashed the benchmark bank rate by 600 basis points or 6 per cent-for the record, at 6 per cent, this rate is close to where it was 30 years ago. The central bank has also reduced the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), thereby increasing the availability of money in the system. If numbers aren't your scene, all these fancy ratios and numbers simply translate into a soft interest rate regime. That's likely to continue: the best Indian companies can raise debt abroad at 4 per cent (including foreign exchange cover); the cheapest they can raise money in India is 5.5 per cent. Ergo, expect the bank rate to travel further south.

Classical economic thinking has it that a low interest rate will improve an economy's productivity. Companies, the logic goes, will restructure their debt, and take on more as part of an effort to grow. And retail consumers will use debt to finance everything from televisions to cars to homes. The same school of thought also posits that should real interest rates fall below zero, people will have no incentive to save. Doing the requisite two-plus-two addition, the present interest rate regime should boost consumer spending and stifle household savings and capital formation. And by doing the latter, it should nip the emerging economic recovery in the bud.

Unfortunately, the Indian economy doesn't seem to recognise classical economics. Yes, it's possible for the real interest rate to remain negative in the short term without impacting capital formation. There is recent historical evidence that supports this: in the second half of 1998, inflation, albeit, that based on Consumer Price Index, zoomed to 20 per cent, and was higher than the then prevailing interest rate-this phenomenon was temporary.

Still, the Indian response to a negative interest rate is original. Despite the desire for higher returns, Indians will continue to invest in the only safe option before them, bank deposits; their faith in the equities market has been shaken by a spate of scams. Indeed, bank deposits continue to grow, although the rate of growth is lower than it was in the past. More worryingly, a low interest rate may force people into saving more so as to earn as much as they would have if the interest rate had been higher. That would reduce consumer spending.

It'll be unfortunate if that happens because companies are loath to invest in additional capacities, despite funds being available at attractive rates, in the absence of a surge in consumer demand. Already, banks are witnessing a sluggish credit growth and most of their incremental deposits are being invested in government securities, driving the interest rate further south. The end result, however, will remain the same as the one forecast by classical economics: no economic recovery.

Which is why, as we in this magazine have repeatedly chorused, macro-economic factors will have less to do with a recovery, when it happens, than good old consumer sentiment and private enterprise's ability to convince consumers that they need a particular product or service. Circa, June 2003, it looks like Marketing 101 has put one over Economics 101.