The finance ministry has been pushing for an interest rate cut since the presentation of the Union budget. The RBI had cut the bank rate, repo rate and CRR immediately after the budget which forced most of the public sector banks to bring down their prime lending rates. Even after this, the outgoing Finance Minister Yashwant Sinha and Finance Secretary Vijay Kelkar had gone on record saying the need for further reduction in interest rates.

Commerce Minister Ramakrishna Hegde had even blasted the RBI for overlooking the interest of exporters and the central bank's move to hike interest rates on export credit with effect from April 1. However, RBI Governor Bimal Jalan had statedthat there was no possibility for further reduction in interest rates as further reduction in interest rates will adversely affect the profitability of the banking sector. Another argument is that even after the low interest rates, exports never picked up last year.

Before the political uncertainty surfaced, it was quite clear that Sinha wanted the RBI to lower interest rate to fuel economic growth. Even now, a change of government does not necessarily mean a change in the policy stance. The logic of an expansionary monetary policy is clear: since no government is in a position to really ease the fiscal side given the runaway growth in expenditure, the only way to keep industry growing in a difficult year is to easy up on the monetary side. The RBI would have liked the government to go easy on borrowing so that interest rates can be brought down. However, but this is near impossible given the huge expenditure pressures. ``The RBI Governor so far withstood pressure from the finance ministry for a cut inrates,'' said a banker.

With inflation ruling at around five per cent, the RBI can take the risk and bring down real interest rates to realistic levels. But the fall of the government has queered the pitch. The rupee is likely to come under pressure and till such time a stable government assumes office at the centre, Jalan can hardly afford to bring down interest rates or release additional liquidity into the system which could find its way into the forex market.

ICICI Securities, the investment banking arm of ICICI, ruled out any CRR cut in the forthcoming policy. "We expect the main thrust of the credit policy will be on structural issues," I-Sec said. According to Investment Research and Information Services (Iris), "The major emphasis of the policy will be on consolidating the wishlist of structural changes that were desirable in the mid-year review of the monetary policy announced in October 1998. The policy will try to abstain from micro-tinkering with interest rates."

If the RBI cuts bankinterest rates further, the question of lowering the interest rates on small savings schemes will also arise. ``The government is not in a position to slash the interest rates on Provident Fund or National Saving Scheme. The savings rate has already fallen in India,'' said a banker. Moreover, any cut in lending rates will be accompanied by a reduction in deposit rates as well.