The governor of the Reserve Bank of India, Bimal Jalan, has successfully demystified the credit and monetary policy announcements. As a result, there is no longer any great air of expectation regarding what the governor will or will not do at the time of his credit policy announcements. With his February 2001 changes, the governor has exhausted his limited degree of freedom. By these changes, Jalan already brought down the bank rate to seven per cent. With inflation ranging around 6.5 per cent, any further reduction in the interest rate will not be justified. Whatever the governor did in February 2001 with regard to monetary easing has accomplished its purpose. More than anything else, it has been well coordinated with the budget announcements of reduction in administered interest rates, particularly on small savings. The liquidity in the economy is also adequate and any further increase of liquidity by the reduction of cash reserve ratio would be uncalled for, especially in the prevalent state of capital markets. The governor's April 2001 announcement on credit and monetary policy would, in my view, be more concerned with rectifying the systemic weaknesses that have been revealed in the light of the capital market-related irregularities, in particular, the Bank of India's honouring the pay orders issued by the Madhavapura Mercantile Cooperative Bank with a haste worthy of a better cause. This incident has also highlighted possible weaknesses existing in clearing the system itself. For the limited purpose of his ensuing credit policy, I think the governor will be expected to lay down guidelines on further refinements in the clearing procedures, particularly of pay orders of high value. Prudential limits related to the size of transactions that would need prior check seem to be in order. The governor's credit policy will also have to address many of the initiatives announced for the banking sector by the finance minister in his budget speech. These primarily involve banks extending credit for infrastructure in rural areas, especially for storage of foodgrains and agricultural products. In translating the budget intentions into reality, the governor will have his task cut out to ensure that the fragile agricultural cooperative credit structure is enabled to function more efficiently - advance credit in time and recover the same fully when due. While on the subject of cooperatives, the governor may announce his decision with regard to the dual control of the urban cooperative banks, which have two masters now - one the registrar of cooperative societies and the other, the RBI. Co-operative banks have, however, resisted any change in this system for reasons of political nearness to the state administration and hence to the registrar of cooperative societies. The latest episode in the Madhavapura Mercantile Cooperative Bank renders it all the more essential that the RBI should exercise direct and unified control on the cooperative banking system. In the hunt for scapegoats for the recent scandal, accusing fingers have been pointed at both the regulators, namely, the Securities and Exchange Board of India and the RBI. Sebi's report on the events under dispute is still awaited. While no evidence has so far surfaced about the RBI's responsibility for the latest volatility of the markets, the danger signals remain. Banks have increased their exposure to equity stocks, especially following the provision of five per cent of advances' limit announced by the governor. This relaxation of credit is entirely justifiable on principle, considering that lack of liquidity has been one of the problems of the Indian stock market. The reform, however, calls for increased awareness on the part of the lending agencies regarding the higher risks they are taking in lending against shares. The fall in equity value leads to a direct hit on their profit and even overall viability. The governor will do well to indicate broad guidelines for banks, which undertake the necessary but 'hazardous' operation of lending against equity. As in the case of foreign exchange operations, banks may require special training of their staff and an appropriate market intelligence set-up to handle equity-related lending. The foreign exchange situation in the country seems to be on a fairly even keel and may not call for any special initiatives in the credit policy. Exports have also scored a record growth in the last year. In this context, however the new export-import policy poses before the governor a formidable list of action points. The commerce minister has also stressed the need for Indian manufacturers to upgrade their facilities. He is engaged in discussions with the finance ministry on the implementation of necessary measures to enable the attainment of higher export targets. In this context, the governor may need to calibrate his credit policy, particularly towards reducing interest rates for export operations, at the same time ensuring adequate availability of credit. Exporters need cheaper credit to compete with their counterparts in other countries, who operate in a lower interest rate regime. Further, exporters have to be afforded production credit at lower rates to be able to supply goods on credit to their importers. Exporter-manufacturers today face a handicap. Special trade credit facilities for exporters qua exporters have also faced considerable erosion in recent years. Keeping in view the goals for export enhancement posed by the commerce minister's exim policy, namely, to raise exports to $ 70 billion, one hopes that the governor will restructure the credit policy. The credit policy continues to be an important barometer of the central bank's thinking on the economy. It is imperative in the current context that Jalan's ensuing policy should take note of the prospect of threat of a recession due to a likely decline in the global economy, particularly of the United States and Japan. He should make allowance for the likely effects of the fall in demand for the Indian products and services abroad and the need to nurse exports, particularly of software. Equally important is the need to take into account the commerce minister's latest relaxations on quantitative restrictions. The extent to which the markets will face a flood of imports as a result of the removal of QRs is a matter of dispute. But, there is no question that Indian manufacturers will face a difficult scenario of higher competition, both in terms of price and quality. The credit policy needs to be fashioned in a way as to provide facilities for manufacturing units that may be forced into a tight corner because of unexpectedly high competition. Non-performing assets of banks may very well increase on this account. But, that should not lead to a credit crunch. An imaginative approach needs to be worked out for manufacturing entities, faced by a sudden decline in fortune because of competing imports. A carefully calibrated credit policy, to provide special support to such units, with credit to nurse them through their initial phase of fighting competition, as a result of QR removal, is called for. The governor can be expected to make his credit policy sufficiently proactive to handle these challenges. The author is former governor, Reserve Bank of India