Policymakers have reason to be satisfied with these achievements, particularly in a pan-Asian environment where a number of emerging economies have witnessed huge wealth destruction as a result of market and systemic failures. This is not to say that there are no areas of concern. The slow and sluggish growth on both the industrial and export fronts is a problem that has to be squarely addressed.

Undoubtedly, the Reserve Bank of India will have to think of measures that will support those announced in the Union budgetto push the economcy back on the growth track. Besides, it will need to take forward the ongoing reforms in the banking and financial markets, the signposting for which has been indicated in previous credit policies.

Changes in key interest rates are always keenly awaited. Further changes to those announced in early March cannot be expected now as the effect of the earlier changes are yet to sink in. A half per cent cut in the cash reserve ratio (CRR) of banks, though not necessary, is desirable at this stage as banks continue to face serious erosion of profitability caused by interest rates cuts and non-performing assets.

Over the last few years, deposit rates have been gradually deregulated. The only significant rate which is still controlled by the Reserve Bank is the savings rate. There is little reason why this rate too should now not be left to be determined by market forces.

On the lending side, the spread between the highest and lowest quality borrowers stands at a maximum of four percentagepoints. There is a case for reducing the gap in favour of the weaker borrower as it is this sector which is worst hit due to recessionary trends in the economy. The gap could be brought down to three per cent.

As announced in the budget, the government will continue to be a major borrower in the market during the fiscal year. The Reserve Bank should now introduce 28-day and 182-day Treasury Bills in the government securities market in order to fill the current gap in tenors, which in any case is a stated policy.

There is also a need for a deepening and widening of the repo market. Increasing the list of participants and allowing repos in non-government debts which are dematerialised will be a step in the right direction.

In the previous policy, there was a decision to create an environment for introducing interest rate management products for banks, primary dealers, and all-India financial institutions to hedge interest risk. Market participants have been eagerly awaiting the introduction of suchhedging products and would like corporates to be also included in the above list for deepening and widening the market. Operational guidelines are expected after the first half 1999-2000 credit policy.

On the exchange rate front, the rupee has remained remarkably steady as speculative positions of corporates have been largely eliminated through administrative measures. Corporates need to be once again given the freedom to book and cancel contracts and, thereby, pursue a proactive hedging policy. This will result in a more realistic level for the rupee as a consequence of market action as per stated policy.

There may be some increase in market volatility, but that will be healthy for market development. Given the steady growth and level of foreign currency reserves, the Reserve Bank should be able to manage the market through intervention. If the current policy of holding the currency steady continues, the Reserve Bank may have to resort to a sharp devaluation in the near future.

Exports, as statedearlier, should continue to be a priority area of our economy. Scheduled commercial banks can play their part in boosting the flow of credit to this sector with the right policy stimulus from the Reserve Bank. The central bank should consider giving 100 per cent refinance to banks whose commitment to export credit is undoubted and has stood the test of time.

The refinance level, instead of being uniform, can be graded such that banks which have a higher percentage of export to total advances get a higher percentage of their portfolio refinanced. Once a bank crosses a hurdle of, say, 40 per cent of advances to the export sector, the entire portfolio should be refinanced. Having fixed the refinance eligibility of banks, it would help if there is no change in the methodology so that banks can work out a medium to long-term lending strategy to the high priority export sector.

The Reserve Bank has justifiably taken the Y2K issue very seriously. Penalties must now be imposed on banks who are not fullycompliant. Y2K compliance ought to be extended to non-banking finance companies and other market participants and stricly enforced. Those who are not fully compliant should not be allowed to participate in the market after September 30, 1999.

The monetary policy must further discuss the progress on the real-time gross settlement system (RTGS) as well as liquidity indicators in the system. The issue of universal banking vis-a-vis role of commercial banks and financial institutions also must be spelt out. Reserve requirements must be imposed on financial institutions to create a level playing field if they are to operate as universal banks.

Clearly, the market has many expectations from the first half monetary and credit policy in terms of general direction and market development and not too much on the interest rate structure per se.

The Wish-List