Some of the more independent minded central bank governors believe that their primary objective is stabilisation of prices and have shown an obstinate unwillingness to change. The mid-term review of the economy paints a relatively rosy picture. The Kharif crop may be comparable to last year, momentum in industrial production may sustain and GDP growth for 1999-2000 may be in the 6 to 6.5% range. Inflation is also predicted at below previous year's 4.8%. Unfortunately, these forecasts look optimistic. Government finances too pose an increased risk. Both the revenue deficit and fiscal deficit are running far in excess of the budgeted estimates. The credit policy gives appropriate warnings and points out the difficulty posed to effective debt management on account of uncertainties associated with the "timing or the size of government borrowings in the primary market". These caveats have been to no avail in the past.

It would be unfortunate if in the second half of the current year too, the increased liquidity provided by RBI helps to finance only the centre's debt and the corporate sector is left abegging. The RBI also continues to overlook forex markets. In its attempt to "maintain orderly conditions in the foreign exchange markets" and "curb destabilising and self fulfilling speculative activities", it decided to do nothing. There was no rollback of last year's measures. At the least, market participants expected that they would be allowed to hedge anticipated exposures. RBI's approach in this regard cannot be commended. If India is looking to attract $10 billion of foreign capital per year; it cannot be on the basis of an illiquid, controlled foreign exchange market. The domestic money markets too cannot develop in isolation.

There have to be steps outlined for their integration and concurrent development. Another anomaly desperate for correction is structure of interest rates in the domestic economy. The RBIgovernor enumerated some of the "structural and other constraints" faced by banks. Among these are interest rates on contractual savings--including PPF and NSS--high costs of bank deposits and tax arbitrage in relation to mutual fund units.

Removing these constraints was outlined as an "important policy priority" for all, but the changes announced for Money Market Mutual Funds (MMMF) without concomitant changes for the banking sector have only exacerbated the situation. Unless something is done to rationalise and link interest raes in the economy, monetary policies will at best have an unpredictable impact. As already considered probable, increase in bank liquidity following the credit policy is unlikely to be passed on to corporate borrowers in the form of a lower Prime Lending Rate (PLR). The markets have largely been unaffected by the policy.

Forward premiums eased by 20-25 basis points and gilts firmed up by a few paise. In this, the market has matured. A knee jerk reaction to policy announcements is never welcome, since it indicates unexpected developments. The RBI has also shown a heartening trend towards greater transparency by announcing "its policy preference for softening of interest rates". If the government does not mess up its act, this could convert to reality.

The author is head, treasury marketing with a leading foreign bank. The views expressed here are his own and not that of the organisation.