Managing the economic crisis to save a political crisis in India.

The Reserve Bank of India's (RBI) quarterly credit policy released today did not have any surprises as both the reverse repo rate and repo rate remained unchanged. While the RBI has finally acknowledged a foregone conclusion that global financial crisis has now affected local economy as the expected decoupling failed to materialise ; it has also correctly predicted that business confidence will continue to remain down for the entire period of 2009. As far as "perceived" unavailability of credit to the commercial sectors and industry is concerned, it has laid the blame squarely on the private sector & foreign banks' stinginess with credit as well as on the drying up of international borrowings.
With such an accurate reading of the situation and being aware of the significance of private sector banks, foreign banks etc on our relatively smaller economy, it is doubly exasperating that the repo rates have not been cut. While economists(like Jehangir Aziz of JP Morgan) have been suggesting a restructuring of the credit portfolio of the banks in order to ease the cost of capital for the industry that would benefit out of the rate cut; banks , in spite of revised targets, now will be more reluctant to release credit knowing that 2009 will be a bad year for growth & returns.
It is true that rate cuts need not accompany the credit policy but when the diagnosis is that of a sick economy in the coming year ; it is probably logical to start the medicine of rate cuts now. Maybe RBI is waiting for an out-of-the-way event like a bank collapse or huge job cuts to happen in order to to justify its rate cuts.
Any cut in repo rate will effectively have a downward effect on the deposit rate of the banks to the extent that rates may slip below that of the small savings schemes and hence a possible flight of consumer savings to those schemes. Coupled with the credit crisis, that can definitely leave the PSU banks with dirty balance sheets in about a year's time. More importantly, with the general elections round the corner in April , it is quite possible that the Indian government will also not like to tamper with the small savings rates at this stage although RBI has officially denied any relation of small savings rates with its own repo rate. Based on an optimism that nothing "untoward" will occur in the economy till the elections are over, RBI may have again chosen to defer the inevitability of rate cuts.
Hopefully, RBI is right!