With the government continuing to be a big borrower in the market and the industry continuing to show signs of recession, the central bank will maintain its soft interest rate regime and it would specify the serious fiscal situation as a negative or constraint for maintaining this stance.

The government has borrowed Rs 98,000 crore till October first week, which is about 69 per cent of the budgeted Rs 1,42,867 crore for the entire fiscal. This means that it is likely to overshoot its target.

It would be interesting to see whether the RBI spells out in detail its concerns on “sustainability of public debt,” a theme it propounded during the last credit policy. The RBI is also likely to mention credit off-take, geopolitical factors and inflation as the areas to watch, for any short-term shifts in this stance.

In line with the medium-term policy of the RBI, there is a case for reduction in the cash reserve ratio (CRR). The CRR refers to the percentage of its deposits in cash that banks are required to keep with the RBI. Reducing this percentage increases the amount of funds a bank can lend to borrowers.

But, since the system liquidity is ample, the chances of a 50-basis points (bps) cut are 50:50. The RBI might also contemplate providing a roadmap to reach the medium-term target of 3 per cent. Any reductions in the CRR are expected to be counter-balanced through open market sales.

The expected rationalisation in refinance limits, which was not done in the previous credit policy, might be attempted now. Further, streamlining could be expected in the call money lending and borrowing operations.

In the light of the poor monsoons, a weak industrial recovery and global economic weaknesses, there is a strong case for a reduction in benchmark rates. The Bank Rate - the minimum rate at which the central bank provides loans to the commercial banks - is increasingly losing its significance since few transactions take place at this rate (viz: refinance which is expected to be reduced or removed altogether sooner than later). And as a signalling device for reduction in non-market products (deposits and loans), it has been ignored by the banking system on the last occasion it was cut.

Having said that, the Bank Rate still carries a lot of psychological value and remains the best indicator for the RBI to signal lower rates especially for non-market products. A rate cut of 50 basis points is therefore possible. And this time around, we might expect the authorities not to link the Bank Rate to the system liquidity.

The Repo rate in particular has been holding up the short-term rates and acting as a break for further reduction in inter-mediation costs. The repo being an “auctioned” rate has been counter-productive and there is a case for the RBI to announce the liquidity adjustment facility (LAF) corridor rates and auction only the amount, or alternatively announce a “RBI Funds Rate” around which it can expect the repo rates to deal.

We believe that there is a strong economic case for a sharply lower repo rate. The RBI had earlier expressed dissatisfaction with the flat yield curve. Since it has now also been expressed by the authorities that the real rates are “high” (in contrast to the previous credit policy stance that the real rates are “comfortable”), there is case for a sharp reduction.

But keeping in view the RBI’s reluctance to effect any sharp changes, we would expect a reduction of 50 bps around the credit policy time. A Bank Rate and repo rate cut of 25 bps each are, we believe, priced into the market levels. Rate cuts at this level or absence of cuts would perhaps lead to a weakness in bond markets.

The savings bank rate was left unchanged “in the interests of household savers” last time. This is the only commercial rate still “controlled.” There is, therefore, an expectation that this rate would be deregulated; if this is considered a bold step, a reduction in this rate might be considered to “align” it to other market rates.

Alignment of yields was one of the objectives expressed in the April policy. The groundwork for Separate Trading for Registered Interest and Principal of Securities (STRIPS) has been done by the committee, and the market is perhaps ready. In the interests of development of a sovereign zero coupon yield curve, we could expect announcement of introduction of STRIPS.

The policy can note (with some satisfaction, perhaps) that subsequent to the previous credit policy (and probably because of the utterances therein), there has been a move to compress the yield spreads of corporate paper over the government.

The credit policy is also expected to indicate developments in areas such as Real Time Gross Settlement (RTGS), Negotiated Dealing System (NDS) and suitable stance and guidance in areas such as Basle II norms, risk management etc. The forex dealers would also be looking forward for some announcements on dollar-rupee options.

The credit policy has undergone several changes in the past decades. In the 1970s, credit policy announcements were called “slack season” and “busy season” policies, underlining the country’s dependence on the seasonal agricultural sector. In the 1980s, this nomenclature fell into disuse with increasing focus on industry.

In 1998, it was decided to announce the Monetary and Credit Policy in April for the whole year instead of for the first half, followed by a mid-term review of the policy in October.