Paradox of falling interest rates

There is a duality in the linkage between the slashing of the discount rate and pumping of liquidity by the central bank in the financial system to enable the banks to continue lending to government at lower rates. This is contrary to the general perception that interest rates are down to spur private growth and induce economic activities.
A brief historic perspective would make it clearer. While the hawks were in command at the helm of SBP, government opted to print more pictures of Jinnah. It could be seen the other way around, that with lesser autonomy at SBP i.e. before the time its act was passed by legislators, government had the luxury of going for high powered money creation at ease to counter its fiscal financing needs.
During FY10 and FY11 the government borrowed a sum close to a trillion rupees from the State Bank to fill its fiscal appetite and at that time a tight monetary policy regime was prevailed. In the first half of FY12 the SBP Amendment Bill was passed by the National Assembly which restricted government borrowing from SBP to net zero on quarterly basis; ever since then monetary policy stance has changed and so has the governments borrowing pattern.
The policy rate has been cut by 400 bps since the start of FY12 and government borrowing from the central bank on net basis was at a mere Rs145 billion. Mind you, the trend has changed lately as government retired its bills to the central bank amounting Rs360 billion since the start of this fiscal and discount rate has been brought down by 200 bps over the same time.
This left the government to rely more and more on the commercial banks to plug in the deficit. In FY10 and FY11 when the rates were high, fiscal borrowing from the scheduled banks (mostly in the form of T Bills) was Rs885 billion. Then SBP cut the benchmark rate by 400 bps in a phased manner and government borrowing from scheduled banks went to Rs1225 billion in just 15 months.
So the rate cut is not about providing stimulus or creating room for the private credit to spur. Rather, it is aimed at facilitating the government to rely on system credit at lower price. The question is; why has the market not adjusted prices on higher demand, given the precedence of quasi government borrowing (wheat commodity financing) at rates higher than that offered to A-class corporate clients by the banks?
The answer lies in the liquidity pumping by SBP through reverse open market operations. Commercial banks rolled over Rs700 billion using the SBP discounting window during last 15 months or so. And this is becoming a permanent feature. This steady supply of credit has ensured that the demand for credit is satiated at relatively lower rates. Had this not been the case, the chances of T-bills rates spiking sharply, would have been quite high. According to an eminent economist the governments fiscal borrowing rates could have been at 50-100 bps lower to the commodity financing i.e. T-bills rates 50-100 bps higher than Kibor.
And according to him if we go back to the IMF, which is imminent, the fund would never allow this practice of permanency of the OMO injection. Once the excess liquidity is mopped up, interest rates will move northward yet again.