Had he announced this on the Budget day itself, not only would the surprise element have gone, he would have also drawn flak from the public, as his move would have confirmed that the RBI is nothing but an arm of the government, and its autonomy is but a myth.

The fact that most banks did not swing into action a fortnight ago indicated that the one-half per cent cut was too little and something more is in the pipeline. There were enough signals from Wednesday's Budget that New Delhi, too, was ready to lead the campaign to cut industrial costs. Interest rates on small savings and Public Provident Fund (PPF) were lowered by 1 per cent to 1.5 per cent. This was in addition to the one percentage point cut in certain postal savings and PF interest rates last year.

Also, a clear indication of the government's fiscal rectitude, which the banking community has been looking for, is the fiscal deficit for 2000-01 adhering to the targeted 5.1 per cent. This should lend credibility to whatever finance minister Yashwant Sinha says about his plan of action in the coming year.

In the past, the wide gap between promise and performance had made one circumspect of whatever the government said. The rare exceptions to this were the early 80s and 1991 when the Centre had to fulfil conditionalities stipulated by the International Monetary Fund. No such conditionalities exist now. But failure to act on the fiscal and monetary fronts can cost the nation dear.

The bank rate cut has to be seen in the light of this background. Now that Mr Sinha has belled the cat, the harmonisation of monetary policy with the Budget has become necessary. In fact, some had mused a total 1.5 percentage points cut in interest rates by early March. Some others prophesied that this would be achieved by April when the new credit policy is announced.

However, it appears that Dr Jalan revels in keeping everyone guessing. His predecessors in the RBI, including C Rangarajan, had considered the annual credit policy formulation a major exercise. They used it as a platform to announce monetary policy changes. But Dr Jalan seems to have vowed to make it a non-event.

The bank rate cut to 7.5 per cent, coming as it did a fortnight before the Budget, was dramatic. He obliged the clamouring captains of industry alright. But why lower it by just one-half per cent? Is it a signal to Mr Sinha that the RBI is against a drastic cut in the interest rate structure unless the government played ball by slashing long-term interest rates?

The Indian economy has slowed down and continues its course southward. GDP growth at 6 per cent this year is expected to be lower than 6.4 per cent last year. Industrial production is decelerating. Contribution by the services sector has plunged to 8.3 per cent from 9.6 per cent last year. The fall in industrial production is coinciding with rising inflation. Clearly, stagflation may grip the Indian economy soon.

The partial opening up of the economy has hit less-competitive domestic industries hard. The problem is likely to accentuate in the coming months as another segment of the tariff wall-quantitative restrictions-is pulled down in April.

Therefore, bringing the cost of credit down, which in turn helps lower industrial cost, should be one of the two pillars if the Indian economy has to be turned around again. The other pillar, of course, is fiscal policy changes in order to give a boost to industry. And this is what Mr Sinha has done in Budget 2001-02.

However, the question is how much more can interest rates be lowered? The RBI obviously believes that a rate cut would stem the slide and spur the economy to a higher growth path. But the surprise element that Dr Jalan achieved a fortnight ago was not of much consequence as most banks adopted a wait-and-watch approach. There was no ripple effect. He lost a golden opportunity to energise the financial sector then.The second rate cut last Thursday, too, fell short of industry expectations.

Has Dr Jalan become cautious after last year's episode? A bank rate cut last year unleashed a run on the external value of the rupee. Banks moved into the US dollar wherever feasible and exporters held back their inward remittances anticipating a windfall from the depreciated rupee.

But that was an extraordinary situation. The outlook for US interest rates was bullish then as the Federal Reserve grappled with reining in the galloping US economy. Those expectations threatened to narrow the gap in the interest rates of the two countries further.

Today, the situation is entirely different. The US Fed has made two successive reductions in its discount rate. The markets are expecting another cut later this month. US Fed chairman Alan Greenspan is ready to go whole hog taking calculated risks to achieve a soft landing for the US economy. The turnaround in the US Fed's view has been dramatic and proactive.

Dr Jalan, too, has such opportunities to seize. But by resorting to a piece-meal approach, he seems to have lost a golden opportunity. The government lowered long-term interest rates by a maximum 1.5 per cent. At that level, the real interest on those instruments is, of course, high but the situation lends itself to taking calculated risks.

Dr Jalan has opted for a safe course. He cut the bank rate by just half per cent on Thursday. He should now use moral suasion to make banks lower the entire interest rate structure passing on further the benefit of a total one percentage point cut. And he should seize the earliest opportunity to cut the bank rate by another half percentage point.

One reason for this urgent proactive action on the monetary front is the unfolding global scenario. China and Pacific Rim economies, heavily dependent on exports to the US, are already panicking over the adverse impact of the US slowdown. Japan has already cut its discount rate. Any proactive action by the authorities here will help exporters to stand in a better stead to face competition overseas.

The credit policy review in April should, therefore, lends itself as an opportunity for a third bank rate cut, other things being equal.