Governor Bimal Jalan's second monetary policy is likely to turn out into a mere stock-taking exercise -- essentially a mid-term review of the economy -- marking a departure from tradition.

Contrary to industry expectations, the central bank is unlikely to effect a cut in the banks' cash reserve ratio and the benchmark bank rate. "There is enough liquidity in the system, and hence (there is) no need to cut the cash reserve ratio. Moreover, it (a cut in CRR) can be done any time during the year if credit offtake shoots up," a source close to the central bank said.

The current thinking in the central bank does not favour a slash in the bank rate as it has veered round to the view that a cut ininterest rates alone cannot spur growth. The central bank is expected keep mum on the export-credit front too, as the earlier cut in rate announced by Yashwant Sinha has not triggered off a growth in credit flow. The Reserve Bank was, in fact, at that point time not in favour of an across-the-board cut in export-credit rates.

"At this juncture, the RBI is finding itself unable to take any view on the state of the economy. Hopes were pinned on agricultural growth, but with excessive rains and floods wreaking havoc in parts of the country, those expectations may be belied. Maybe the central bank wants the government to make all announcements to spur the growth engine and confine itself strictly to monetary and credit segments and supervision of the banking system," a senior analyst with a brokerage said.

What is, however, likely to lend a measure of comfort to the central bank is the relative stability of the rupee, which has stood its ground despite the recent rating downgrade by Standard andPoor's.

Observers say the central bank is likely to continue to keep a close tab on speculators and not allow any spillover of excess liquidity into the forex market. If sources are to be believed, the central bank will also refrain from making any comment on structural adjustments--an issue close to Jalan's heart. In all probability, the central bank will take cognisance of the Narasimham and Khan committee reports, but will avoid making any commitment on the implementation of their advice.

Finance minister Sinha has already announced the government's decision to raise banks' capital adequacy ratio to 10 per cent in two stages following the recommendations of the Narasimham panel. The Reserve Bank is widely expected to announce a tightening of the asset-classification norms in its October 30 policy. However, this is unlikely to happen despite Jalan's tough talk at the recent global banking conference in Delhi. Jalan made it clear at the conference that prudential norms will be tightened to enable banksreach global standards.

"There is unlikely to be any change in the non-performing asset norms as the growth in bad loans is a fallout of a non-performing economy.

The central bank may not take any drastic action at this juncture," a senior banker said.

The central bank may also find it tough to implement the second Narasimham committee's recommendations unless the government makes up its mind on whether or not it should dilute its stake in state-run banks.

For instance, the central bank may not be able to support Narasimham's views on recapitilsation unless the government decides to cut its stake, allowing banks to access the capital market.

The panel had recommended that the government pare its stake in banks to 33 per cent from 51 per cent.

The Reserve Bank-appointed Desai committee had recently submitted a "discussion paper" on the recommendations of the Khan panel on harmonising the roles of banks and financial institutions. The central bank is believed to be in favour of sequencing theharmonisation stretched over a few years.

Insight

The policy is being framed against a backdrop of concern over the fragility of the financial system worldwide as also within. The Unit Trust of India's US-64 crisis has led to an erosion of confidence in the health of the financial sector.

The widespread under-reporting of non-performing assets by banks has not helped either. That is one of the reasons why the stock market has been driving down the price-earnings multiples of financial sector stocks.

The central bank may, therefore, choose not to rock the boat by initiating measures for structural reform now. Tightening NPA norms now, for example, may only exacerbate the crisis of confidence. At the same time, consumer price inflation is ruling at over 15 per cent, while money supply growth has been more than 19 per cent. Although it can be argued that the inflationary pressures are caused by cost-push factors, some monetary tightening may be needed.