Consider the dilemmas faced by the central bank: First, the policy statement acknowledges the inflationary pressures faced and the need to tighten money supply. At the same time, it recognises that growth is not picking up, and realises that tightening money may nip growth in the bud.

Second, the Reserve Bank also knows that while tightening the income recognition and asset classification norms is essential, the banking industry is too fragile now to be ableto absorb the effect of such a tightening.

Third, while the RBI also knows that there are many areas where government policy has a detrimental effect on the health of banks, it is also aware that it is helpless to correct these policies. The mid-term review points out, for example, that the provision of rupee export credit at current rates is not sustainable; also that it is not feasible for banks and financial institutions to increase the share of government securities in their overall asset portfolio without affecting their own viability.

Faced with the realisation that the current financial system is unviable, a fact underlined by the UTI imbroglio and the huge provisions being made by institutions like the IFCI, the RBI has decided that wisdom lies in making haste slowly.

The RBI seems to err on the side of optimism so far as its analysis of inflation is concerned. First, it believes that agriculture growth is likely to be 3 per cent this year. Many economists do not agree, and the CMIE forecastsagricultural growth of only 1.2 per cent in 1998-99. As a consequence of its high forecast, the RBI expects inflationary tendencies to be contained with the arrival of the new crop. But if the kharif crop is flat, as many forecast it to be, supplies may not be enough, and the pressure on prices may continue. The massive increase in money supply will, in the meantime, stoke the rise in prices. The RBI has given any number of indications, however, that money can be tightened at any moment, which would mean that interest rates can only rise from here.

So far as the structural reforms are concerned, the RBI's detailed guidelines far into the future could turn out to be an exercise in wishful thinking. For the simple reason that if the downtrend in the economy continues, corporates will be in worse shape two years down the line than they are now. More significantly, the restructuring of Indian industry will lead to a plethora of shake-outs, and may of today's blue chips could well end up as NPAs. There has beenlittle pro-active thinking on this aspect. Banks and FIs need to actively scout for and fund acquisitions, mergers and arrange spin-offs so that corporates become more viable. The RBI has not provided any lead to banks in this matter. Further, it is all very well to tell banks to tighten NPAs. But there has been no detailed plan about what is to be done with the weak banks. Jalan's measures to strengthen bank balance sheets seems to be the monetary policy counterpart of Yeshwant Sinha's dream of getting the fiscal deficit down to 3 per cent over the next few years.

The stock market has driven down bank stocks, and there is no question that the measures announced today, if implemented, will impact bank profitability. For the present, the necessity to increase capital adequacy could serve as a deterrent from banks' going in for a share buyback.