The political background is the most important determinant of the features of the slack season monetary policy, due on May 18. Until the approach and future policies of the new central government are clear, it is unlikely that the central bank will initiate any major policy changes. 
 
During the announcement of his first policy last October (this will be his second), the Reserve Bank of India Governor Y V Reddy had spoken of "change with continuity" in his future policy announcements. 
 
The positives and negatives in the economy have balanced out reasonably well, and no major measures are expected in the policy. 
 
However, developments in the external sector will affect interest rates, and the RBI's objective would be to ensure a steady exchange rate with adequate liquidity to fund economic growth. 
 
The monetary policy this time is being drawn up against the background of RBI's keenness to push banks into a variable interest rate structure (to guard against unexpected volatility in interest rates), introduction of the benchmark PLR (to introduce transparency and uniformity in lending rates), adherence to investment fluctuation reserve norms (to provide for a possible depreciation in the value of SLR investments), transparency in market operations brought about by the NDS, efficiency in settlement mechanisms created by CCIL, upgrading of payment and settlement systems to international standards through the introduction of RTGS, reduced role of non-bank lenders, appearance of OTC rupee derivatives (to help manage interest rate risks by generating depth and liquidity through non-bank participants), and operations of CBLO (to reduce dependence on call money). 
 
Thus, the following measures are expected in the forthcoming monetary policy: 
 
Bank rate - A reduction is possible, in order to help bridge the gap between deposit and advance rates. Repo rate - No change is expected, as higher US interest rates are likely to bridge the gap between the rupee and dollar rates of interest. 
 
Export credit refinance facility - An increase in post shipment refinance from the current 180 days to 270 days may be announced, to help exporters postpone receivables and thus bridge the gap between the demand and supply for US dollars. 
 
Backstop facility - No change is expected, since this facility has not been used in the present liquidity situation. Overseas investments by MFs and corporates - Further liberalisation is possible. 
 
100% forward cover facility for FII/FDI investment flows - A provision for this is possible, in order to generate demand for forward dollars and thus remove the existing imperfections in the rupee swap market. 
 
The policy is also expected to deal with the following credit delivery mechanisms:

• Introduction of measures to help accelerate flow of credit to the infrastructure sector.
• Tightening of guidelines for banks' compliance with priority-sector lending.
• Reiteration of the need to exercise caution in housing loans.
• Application of measures to enhance the availability of credit for agriculture, probably through the enhanced usage of KCCs.
• Introduction of incentives to help drought-affected farmers and to ensure availability of credit for harvesting.
   
  

Finally, by way of supervision and governance, the monetary policy is expected to emphasise enterprise-wide risk management systems in banks, to accelerate the introduction of risk-based supervision through improved MIS and reporting systems, to push for technology upgradation to ensure real-time on-line monitoring of banking operations and risk factors, to encourage balance-sheet transparency for the banking sector, and to further improve banks' financial health through strict adherence to norms for NPA recognition, CAR and IFR build-up. 

-- Bhaskar Ghose, managing director, IndusInd Bank.