Five years ago when Bimal Jalan took over as the governor of the Reserve Bank of India (RBI), he promised to make credit policy announcements a non-event. On October 29, Jalan presented his 10th credit policy and still made news. Jalan drove the bank rate (the rate at which the RBI lends to banks) to 6.25 per cent-a 29-year low-to deliver that rare shot of good news.

ALL CREDIT: JALAN

Typically, there was a chorus for more. Jalan's 25-basis points cut last week triggered lament from industry chambers which described it as tokenism and inadequate. Shorn of short-term expectations, there is no doubt that the low inflation and the low interest-rate regime (see graphics) is perhaps the Government's biggest achievement. Especially considering the circumstances it has been achieved in: the East Asian contagion, the Kargil war, 9/11 and, of course, the burgeoning government borrowings expected to touch Rs 1,42, 867 crore this year.

Jalan modestly describes it as the dividend of a low rate of inflation triggered by competition and the "alignment in the outlook of the Government and the RBI". Truth is, Jalan has aligned surging deposits (now Rs 12,42,000 crore), rising forex inflows and ballooning government borrowings to deliver a stable monetary regime.

To appreciate, consider this: India's forex reserves have shot up from $25 billion in 1997 to over $64 billion. Every time it bought dollars, the RBI kept the rupee from appreciating to give exporters an edge. Simultaneously, it was creating rupees. This dammed liquidity irrigated the government's huge borrowing programme and kept inflation and interest rates low.

For an economy used to double-digit inflation and interest rates, the slide is almost unreal. Indeed, depositors and borrowers prefer fixed to floating interest rates in the hope/fear of a reversal. These fears are in the realm of probability, but low interest rates are for real and have helped shore up the economy.

The popular perception is that only the government has benefited. But, as Jalan says, "Every class of borrower has benefited (see interview)." Jaspal Bindra, CEO, India region, Standard Chartered, points out, "Input costs have come down making corporates more competitive and viable on a global basis." Individuals too have gained. Says Jagdish Khattar, chairman and managing director, Maruti Udyog Limited: "Interest rates have slid from 21 to 12 per cent. Consumers need to pay just 25 per cent of the price upfront as against 70 per cent earlier to acquire a car." Keki Mistry, managing director, HDFC Ltd, adds, "With tax incentives, a home loan now costs between 7.5 and 8 per cent as against 16 to 17 per cent five years ago."

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It's not just about cars and homes. Chanda Kochhar, executive director, ICICI Bank, says, "Manufacturers and dealers pass on hefty discounts to consumers enabling them to migrate from one economic strata to another. People are able to meet their needs at a much younger age." Indeed if banks closed the gap between the PLR and bank rate (11 and 6.25 per cent), it would spur consumer finance and increase offtake.

It's not good news all the way. A.N. Shanbhag, personal finance expert, believes that in the absence of alternative avenues "falling interest rates have hit the small investor badly". Milind Barve, managing director, HDFC Mutual Fund, disagrees: "Falling interest rates have made mutual funds-which have delivered 14 per cent returns this year-very attractive."

As investors mull over options, at a macro level there are fears that falling interest rates could trigger a drop in savings. Ajit Ranade, chief economist at ABN Amro Bank, believes the jury is out on this. "People can either save more money aimed at a targeted return or see no point in saving and spend more using financing deals." Either way the economy is bound to benefit.

Alas, the softening of rates hasn't helped push growth. Jalan, however, is hopeful. But given the structural rigidities, Jalan's wand can't create growth. Indeed, Shankar Acharya, director, icrier, says, "We are in a zone where the role of monetary policy is not too dramatic." In short, action now needs to shift from Mint Street to Room 134 at North Block.

INTERVIEW: BIMAL JALAN

"There is plenty of liquidity and we are watching"

A day after his 10th Credit Policy RBI Governor Bimal Jalan spoke to Senior Editor Shankkar Aiyar on what decided the decline in interest rates and the road ahead.

Q. What is the formula behind the successful softening of interest rates across five years?
A. It's a combination of factors. Financial sector reforms have enabled the RBI to use instruments to manage the government's borrowing programme better through private placement and open market operations. More importantly, we have been able to cut CRR and follow a easy monetary policy because the rate of inflation continues to be low ... even in this year of drought.

Q. So how did we enter this low inflation regime?
A. It is the result of reforms, increasing competition and low manufacturing inflation.

Q. How much credit would you give the Government?
A. The Government has been highly supportive of what the RBI has done and everything was done in consultation. The direction of policy is theirs and there is consistency between our outlook and their outlook.

Q. There is a feeling that the slide in bank rate isn't matched by the high PLR.
A. Interest rates have come down for all sections of borrowers. The bulk of borrowers would be paying less today than four or five years back. Sure there is expectation that banks must cut further but you must acknowledge that there is stress in the system.

Q. Given the forex inflows, low inflation and liquidity, why not a bigger cut, say 3 per cent?
A. That would drive the interest rates below the cost to the banks and aggravate the stress in the system.

Q. Why has investment not picked up?
A. We have created monetary and liquidity conditions that are favourable for investors. They have to take a long-term view. If public investment goes up, off take of goods will improve and investment should pick up.

Q. There will be no more cuts. End of good times?
A. No, we are simply stabilising and managing expectations. There is plenty of liquidity and we are watching.