What strikes a discordant note, however, is that the banks were flush with unutilised funds even before the latest cut in the interest rate. This is borne out by the increased bank holding in government paper over the last six months. If market credit demand was, indeed, being constrained by inadequate funds, why would banks overlook the market demand and park their funds with the government at lower interest rates?

Of course, it must be realised that banks have become extremely shy of extending credit which could result in burgeoning NPAs (non-productive assets or, simply, loans which go sick). NPA norms have been continuously tightened by the RBI and banks can no longer play ducks and drakes with public money as they did during the good old pre-reform days. Remember the loan melas? As a result of the tighter NPA norms, banks are willing to deliver credit at low interest rates (sometimes even at negative interest rates) to their most creditworthy clients. Usually, such accounts are just a handful. Then comes the mid-band of borrowers, whose creditworthiness is not as good and banks, perforce, hedge their lending to this group by demanding (and getting) higher interest rates. The third, and largest, group consists of the small industries, most of them first timers, who have yet to build a credit track record or whose business acumen is suspect from the bank’s point of view. The few lucky applicants from this group get loans at very high interest rates from banks, while the bulk of them are forced to either abandon their projects or seek finance from other sources (both legal and illegal) at still higher rates. Hence, while the total credit demand from industry and the market may be higher than the loanable funds available in the banking system, only a very small percentage of the demand is actually met by the banks and the rest of the funds are parked in government paper where the return is small but security is 100 per cent. The government, of course, is always in need of money and does not look this gift horse in the mouth.

In fact, it would probably not be averse to promoting this trend as there is no end to the government’s needs. It has milked the public sector undertakings of their profits by demanding, as the right of a sole shareholder, higher and higher normal dividends and a number of interim dividends from profit making outfits; it has taken away funds from reserves created for specific purposes, as for example the oil pool fund and it has even attempted to coerce regulatory authorities (TRAI, IRDA, SEBI, for instance) into depositing their income into the Consolidated Fund of India, rather than keep it with them to improve regulatory and industry standards.

If the Reserve Bank of India feels that the government, as the largest single borrower of bank funds (it is, at 39 per cent!), should be most benefited by the credit policy, then the cut in the bank rate and the CRR make sense. It certainly cannot be said to be in the long term interest of the nation to reduce the bank rate to a point where the real interest rate becomes almost negative and to increase the liquidity of an already bulging bank system. Too much money in the system leads to inflation as, after meeting productive demand, the money is likely to go into unproductive areas.

In his press conference after announcing the credit policy, the RBI Governor was rather unconvincing in justifying his "judgement call" that mounting inflation was not a major worry because, "the rise in the recent past is concentrated on a few items and excluding these items, the inflation rate actually works out to just 2.7 per cent at the end of March." How convenient! Inflation rate too high? Let's ignore those items with the highest price rise and base our "judgement call" on what’s left!!

Ironically, on the very day the RBI Governor was making this "judgement call", the Finance Minister admitted in the Rajya Sabha that he was concerned at the increase in the inflation rate. He, however, justified the Central Bank’s projection as "realistic" hastily qualifying the answer with the words "in the medium term." He attributed the rise in the inflation rate to the Gulf War and the drought. The Gulf War has since ended and crude prices have fallen, leading to a reduction in retail petrol and diesel prices. The inflation rate, correspondingly, dropped a few points but is still above six per cent. As regards the weather, the Credit Policy says, "the progress of the south-west monsoon is important so that supply constraints, which could have an adverse impact on inflation, do not emerge." It also leaves an escape route for itself by stating: "In case demand pressures emerge and the inflationary situation worsens, which hopefully will not be the case, the present monetary policy may have to be reviewed."

So what the Policy is saying is that we hope that the monsoons are good and we hope that inflationary trends will not worsen but, in the meantime, we still have a little slack so we are reducing the bank rate and increasing liquidity in the banking system (knowing full well that almost 40 per cent of the liquidity will go back to the government as very low interest deposits in keeping with the existing trend).

The Reserve Bank Governor was specifically questioned on the issue of the huge deposits by banks in government paper. His answer: "Yes, it does (distress me). No, I don’t agree that this huge influx in government securities is the consequence of excess liquidity in the system." Where exactly does he expect the banks to park their excess funds once public credit demand (from ‘creditworthy’ borrowers only) has been met?

So, is the Reserve Bank of India, through its credit policy, progressing price stability and growth or is it creating more ‘reserves’ from which the government can draw funds to meet its ever increasing requirements? It conveniently ignores the fact that a near negative rate of interest could have an immense adverse impact on overall savings—an impact that would be felt not just by the fisc but the common man whose incentives for saving are being determinedly whittled away by every credit policy of late, and even in between.

Some of the major factors that the RBI failed to take into account in preparing the Policy statement (or simply ignored as inconvenient) are the SARS scare, the impending electricity privatisation bill, the rise in basic telecom rates and the hike envisaged in service charges.

All these factors were in operation or within public awareness when the Credit Policy was prepared. SARS was beginning to impact exports of gems and jewellery, food items, clothing, etc. Since then, SARS infection and deaths have gone up, and the impact on trade and exports today is beginning to pinch.

The electricity bill provides for the almost total privatisation of the power sector in India. It is based on the assumption that only a profit-oriented body (the private sector) can afford to transform the scam and inefficiency-ridden power sector into a real infrastructural support for the economy and, at the same time, not lose money. The usual sermons are, of course, being offered on how the privatisation is going to lessen the burden on the consumer. The very legislators who passed the privatisation bill will be the first to howl when power prices go up.

Take the case of the telecom industry. There has been a revolution in the sector. Prices of calls have crashed. Services have improved and competition has ensured that the consumer is king. But charges for basic lines (MTNL and BSNL gainers) have been increased by TRAI. The very people (the legislators) who passed the TRAI Act empowering the regulator with full autonomy are now demanding that the government curb its powers so that it can override its decision.

Then we have the proposed increase in Service Tax from five to eight per cent. This is going to have a direct impact on prices and will boost inflation, as will the other factors listed above. Despite all these available indicators of looming inflation, the RBI chooses to hope that the pressure will not worsen and goes ahead and reduces the bank rate.