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October 19, 2001
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Jalan may surprise markets this time, feel bankers

BS Banking Bureau

Reserve Bank of India governor Bimal Jalan seldom surprises the markets. His credit policies, by and large, have been devoid of monetary measures. This time, however, bankers feel that he may make an exception. The benchmark bank rate as well as banks' cash reserve ratio may be cut in the mid-week review of monetary policy to be unveiled on Monday.

Indeed, he might even announce it a day in advance to follow the tradition of not making the biannual affair a platform to make policy announcements.

Ever since Jalan took over as the country's chief money man in November 1997, he has changed the rules of the game. During his tenure, he has changed the repo rates around dozen times. Only once, in April 1998, was it part of the policy.

Similarly, Jalan cut the CRR on the day he joined.

Since then it has been altered again around 12 times. Only twice-in April and October 1999-was the CRR cut part of the monetary policy. He changed the benchmark bank rate nine times and only twice-in April and October 1998-was it part of the policy package.

Why should Jalan bite the bullet this time and announce a cut in bank rate? Some corporate heavyweights feel that it will help prop up business sentiment, though many bankers are not very comfortable with the idea.

Since September 11, 14 central banks across the globe have cut rates, fearing that the US-Afghanistan war may delay an economic recovery.

The Federal Reserve of the US has cut rates twice over the last month and nine times this calendar year. The benchmark Federal fund is 2.5 per cent and the discount rate 2 per cent -- the lowest since the time of the Kennedy administration in 1962. The Fed is even ready to cut the rate further if the US economy needs it.

But Jalan is no Alan Greenspan and India is not quite the US. Jalan may be inclined to tread the rate cut path with caution-last year he had to rollback the cuts within three months.

Moreover, there is no certainly that the bank rate cut will be transmitted down the line in the system, as banks are not in a position to cut their deposit rates further.

Those who disfavour a rate cut at this point also say that banks can lend to companies at a cheaper rate (as they are allowed to lend at sub-prime rates) without the bank rate cut being cut.

As a matter of record, Jalan has been continuously expressing his preference for a softer interest rate regime and adequate liquidity. Still, he has been resisting pressure from finance minister Yashwant Sinha who is quite vocal about the need for a rate cut. Jalan's principal concern is the external uncertainties.

If Jalan can firm up his view on the uncertain times, he may bite the bullet. Both the bank rate as well as CRR could be cut by at least 50 basis points each, bringing down the bank rate to 6.5 per cent -- the lowest ever --and CRR to 7 per cent.

The only question is: will this be done on Monday? Or will the governor announce this by this weekend?

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