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Short on action, long on impact

Tamal Bandyopadhyay in Mumbai

The Reserve Bank of India governor Bimal Jalan's 10th credit policy is a politically correct statement. Prima facie, he has kept all the constituents in the financial sector, which have something or the other to do with the policy, happy.

The North Block should feel happy too as the central bank has cut the signalling rate, the benchmark short-term rate as well as banks' cash reserve ratio to keep the low interest rate regime stable.

It must have also heaved a sigh of relief as Jalan has left the savings rate - the holy cow of the Indian financial system - untouched. He dared to do it earlier but could not repeat it today. This will also make him popular with the vast middle class saving community.

The corporations are happy as the banks have no choice but to pare their lending rates further after these troika of cuts.

What is more, the normally neglected small and medium enterprises and the agriculture sector have also reasons to cheer as banks will now be "forced" to cut their prime lending rates. There have been no bank rate cut since the last October policy and PLR has become redundant as banks have been disbursing loans at below PLR to the top-rated corporates only.

In fact, the percentage of borrowers getting the sub-PLR benefit has increased from 17 per cent to 37 per cent. But as far as the SMEs and agriculture sectors are concerned, they can only get the benefit as and when the banks lower their PLR as they are not the top-rated borrowers. Now, the banks will pare their PLR and pass on the benefit to this segment. Finally, the bond dealers have also reasons to raise a toast to Jalan's policy as had he not announced the cuts, the market would have tanked.

Since the markets had already discounted the rate cuts and anything other than the cuts would have an adverse impact on the yield of the government securities.

Does that mean Jalan's 61-page credit policy document is the proverbial play to the gallery? Or, did he try to play a Greenspan in India by resorting to a finer 25 basis points bank rate cut which he has not done before? Frankly, Jalan does not have much of a choice. In August, he had expressed his helplessness and spoke about the "ineffectiveness" of the monetary policy in an environment which is constrained by the stark fiscal realities. Announcing from that platform, RBI's mid-term review of the monetary and credit policy cannot deliver more than what it has.

As is his wont, Jalan has avoided a big bang approach and continued with his gradualism. The cuts are more symbolic than anything else even though both bank rate as well as CRR are now at their three-decades low level. But the impact of these cuts can be far reaching as bank chairmen across the board could hardly finish their post-policy luncheon on the Mint Street and rushed to convene their asset-liability committee meetings to take stock of the situation.

At least two banks cut their deposit rates and one bank the PLR hours after the announcement of the policy. More and more such announcements will follow over the next few days. What Jalan could not do on earlier occasions by effecting higher doses of bank rate cuts and slash in CRR, has been able to do this time. One needs to see the banking community's urgency to cut their lending and deposit rates.

Jalan will probably wait for the US Fed decision on rate cuts and the February 2003 Union budget (whether it will cut the small savings rate or not) to prepare for his 11th policy in April next year. He has stabilised the expectations from the policy. It's now up to the corporates to bite the credit offtake bullet.

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