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It was Mr Bimal Jalanís view that two dates have no special sanctity. Consequently, monetary policy changes are now announced as and when necessary, and not on two specific dates. In his first monetary and credit policy statement, Mr Venugopal Reddy hasnít deviated from this stance. Expectations of a bank rate cut from the present 6 per cent or a cash reserve ratio cut from the present 4.5 per cent have therefore been belied. The Reserve Bank of India rightly thinks the macro-economic situation is stable. The rupee may have appreciated against the dollar, but has depreciated against other currencies. Merchandize exports in dollar terms have increased by 10 per cent in the first six months of 2003-04. Despite the redemption of $ 5.5 billion worth of Resurgent India Bonds, foreign exchange reserves have increased and the markets have been orderly. The only concern is over unhedged foreign currency borrowings by corporates and through banks. This will now be ensured for loans over 10 million. Domestically, after the good monsoon, the growth projection of the gross domestic product has been increased from Aprilís 6 per cent to between 6.5 and 7 per cent. As the RBI itself acknowledges, this may err on the downward side. Given agricultural growth projections of 9 per cent, GDP growth may actually inch closer to 8 per cent. Now that the spectre of an increase in global oil prices has disappeared, spliced with the good monsoon, annualized inflation projection had dropped from Aprilís 5 to 5.5 per cent to the present 4 to 4.5 per cent, with an acknowledgement that actual inflation may be lower. Hence, the bias towards softer interest rates will continue. But in the RBIís diagnosis, there is no liquidity problem, especially with global capital inflows. Therefore, contrary to some market expectations, there is no immediate need to tinker with the bank rate or CRR.

The drop in bank stock prices is presumably no more than a short-term reaction and broader stock prices have jumped, thanks to the overall good news. The thrust of Reddyís maiden policy has rightly moved to reform issues, including credit delivery, such as for agriculture and small-scale industry. Micro-finance procedures will be simplified and some more market instruments will soon be announced to manage liquidity better. Perhaps most significant is the setting up of several committees that will revisit reform issues in the financial sector. This includes an identification and monitoring system for systematically important financial intermediaries, investment fluctuation reserves, asset classification norms and regulatory and supervisory issues for development of finance institutions.

Rather than the myopic view of interest rate cuts and increased liquidity, the mid-term review thus rightly focuses on institutional and structural reform that will improve governance and reduce transaction costs. There is also explicit acknowledgement that there is a limit to what monetary policy can achieve. Despite the bullishness, the governmentís fiscal house is not in order and government debt is increasing.

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