However, there is one caveat: the central bank will not hesitate to "reverse" the stance of the policy "if actual outcome happens to be substantially different from what was expected". The hint was obviously towards external uncertainties as well as political instability at the centre.

In a string of policy measures addressed to ease liquidity and carry on the message of reforms, the RBI has cut banks' cash reserve ratios (CRR) by half a percentage point effective May 8; introduced aninterim liquidity adjustment facility for banks abolishing all sectoral refinance except for export credit refinance; widened the money, repos, government securities and debt markets; rationalised lending rates by giving banks freedom to float tenor-linked prime lending rates and fixed-rate project loans; and tighetened prudential norms by raising the current category of banks' investments to 75 per cent and capping investment in subordinated debt of other banks at 10 per cent of the capital.

"The priority before the Reserve Bank of India is to ease liquidity. Banks should not be constrained to provide credit for productive purposes," Jalan said with an implicit hint that banks should bring down their lending rates. "We have created the liquidity conditions... made out policy preferences clear. Now it is up to the banks to decide...," Jalan said.

Some of the nationalised banks that did so in March, following an earlier round of downward interest rate signals, are reluctant to do so now.

The RBI governoradmitted that the present level of low inflation and high rate of growth in money supply actually warrant a tightening of liquidity and increase in interest rates to dampen demand and avoid "potential problems". Despite that, the RBI has cut the CRR, releasing Rs 3,250 crore into the system as a tight money policy may dampen industrial growth further. This, in turn, could lower governmental revenues, triggering higher government borrowing. "There is no option but to carefully balance conflicting considerations.... flexibility in respect of monetary policy may have to be exercised in both directions: tightening as well as loosening as circumstances warrant," Jalan said.

As far as the stance of the monetary policy is concerned, the RBI has not budged an inch from its position on March 1 when it announced cuts in bank rate, repo rate and CRR within 48 hours of the presentation of the Union budget. The objective continues to be "facilitating adequate availability of liquidity along with stable medium andlong-term interest rates, with policy preferences for softening to the extent circumstances permit," Jalan said.

Senior bankers ruled out any immediate cut in lending rates but admitted that the pressure on interest rates will ease despite the high level of government borrowing as a result of the infusion of liquidity through the CRR cut. Banks, will, however adopt multi-tier prime lending rates linked to the tenor of loans following the RBI directive. The central bank has also given them freedom to float fixed-rate loans for project financing.

In conformity with the Narasimham Panel (II) recommendations, the RBI has introduced an interim liquidity adjustment facility (ALAF) by replacing the general refinance facility with a collateralised lending facility (CLF) and an additional collateralised lending facility (ACLF) at different rates (see section II of today's paper for details).. "We will abolish all sectoral refinance facilities barring export credit refinance," RBI deputy governor YV Reddysaid.

In yet another step towards structural reforms, the RBI widened the repos market and introduced interest rate swaps for the development of the derivatives market. It has opened the repos market to UTI, LIC, IDBI and other non-bank entitities, gradually shifting them out of the overnight call market which will be developed as a purely interbank market, Reddy said.

On the government securities market front, the measures include offer of enhanced underwriting amounts to primary dealers, announcement of an annual treasury bills calendar and a proposal for issuance of new loans on price basis instead of the current practice of yield basis.

It has also strengthened the prudential measures by raising the current category of banks' investment portfolio to 75 per cent in March 2000 and capping banks' investments in other banks' subordinated debt issues at 10 per cent of the capital. It has, however, relaxed the asset classification norms to an extent by reducing the period of a rescheduled substandardassets from two years to one year and giving banks freedom to determine the date of "commercial production" of recession-hit industrial units.

It has kept banks' investment in venture capital out of the overall ceiling of investment by banks in ordinary shares, debentures and mutual funds which is currently pegged at five per cent of the incremental deposits. Investment in venture capital will also qualify for inclusion in priority sector lendings.