Unfortunately, the Reserve Bank's ability to manage these macro-variables had been limited by exogenous factors. In the aftermath of the sharp depreciation of the rupee over the past 10 months, the necessity to manage the exchange rate has left the Reserve Bank with little room to maneuver in so far as interest rates are concerned. Despite the continual slowdown in industrial activity, it has been forced to reconcile itself with the sharp upward shift in the term-structure of interest rates, which was precipitated by a three percentage point increase in the repo rate on August.

The bank's hands have been further tied with the need to monetise the huge deficit of the government. In the absenceof Reserve Bank's support to the government, the interest-rate structure might have shifted up even further, jeopardising industrial recovery. The impact of such monetisation on the supply of broad money and the inflation rate has been well documented.

Given the constraints faced by the Reserve Bank in discharging its responsibilities, it was poised to lose control of one of the macro variables, and it has gone a long way towards vindicating itself in that respect.

The increase in the capital adequacy ratio from 8 per cent to 9 per cent was somewhat expected. The reduction of the default benchmark from 24 months to 18 months is also a development in that direction. But perhaps the most important prudential norm introduced by October, 1998, credit policy is the capital adequacy requirements for government and, more importantly, government-guaranteed securities. It has often been felt that the so-called moral hazard of lending institutions for advances to public-sector units, especially by way of privatelyplaced instruments, should be reined in, and this norm should go a long way towards addressing this issue. However, the bank has remained silent on the short-term impact of such measures on the availability of credit for non-prime borrowers.

In our view, regulatory authorities move in the direction of facilitating hedging against (adverse) interest rate movements by way of the interest rate swap proposed by the Reserve Bank. This is a welcome move.

While the Reserve Bank has done well to act on institutional issues, it seems somewhat resigned to policy stalemate that has been outlined. It merely takes note of the fact that commercial banks' support to the commercial sector has grown by a paltry 4.6 per cent since March 31, 1998, the corresponding figure for 1997-98 being 4.5%. This is in agreement with the Reserve Bank's view that industrial growth registered last financial year. Similarly, it has "hoped" that the inflation rate would be lowered by the arrival of the new crop. Whether or not a 3 per centgrowth in agriculture will materialise to lift the GDP growth rate to 6 per cent and reduce the inflation rate is a matter of debate.