Given the rise in other benchmark interest rates and the short-term nature of the bank rate, leaving it unchanged will reduce its significance as a key reference rate and an important signalling device, the report stated.

There has been a considerable flattening of the yield curve over the past six months with short-end yields rising by about 200 basis points, medium end (five years) by 100 basis points and long end by 45 basis points. The cost of funds for banks has certainly increased without a corresponding rise in their lending rates.

The more worrying factor is that during a period of industrial slowdown and sharp declines in corporate profitability, the risk premium (over sovereigns) charged by banks to the corporate sector has actually declined.

The policy is also likely to address structural issues and focus onstrengthening of the financial system than on indicating any firm direction for the interest rate movement over the rest of the year, the report added.

The recent developments in markets around the world and growing concerns about financial institutions in particular have underlined the need for an effective monitoring system.

Therefore, risk-management tools which can qualify the credit and market risks associated with business and serve as important indicators of the financial health of the banks need to be implemented. The tightening of provisioning norms and increase in the capital-risk adequacy requirements could be very much on the cards.

The RBI's concern about the rising inflation and the recent spurt in money supply will prevent any reduction in the cash-reserve ratio despite the fact that currency marked uncertainties -- which led to the CRR hike in the first place -- have subsided considerably in the past couple of months.

On the Reserve Bank of India move to support Unit Trust of India,the report said that any monetary assistance from the RBI to keep UTI from selling its equity holdings would be equivalent to the RBI providing a line of credit to support the stock markets. ``Such a measure would dilute the effectiveness of the RBI's monetary policy and vitiate its efforts of reigning in money supply,'' the report stated.

Morgan also expects the credit policy to get financial institutions firmly under the RBI's regulatory purview. Supervision of banks and financial institutions also needs to be stepped up to ensure compliance with the RBI guidelines. With the increase in market volatility and vulnerability to external shocks, use of risk management systems needs to be made mandatory for banks and financial institutions.

While there has been some talk of assigning a positive risk weight to bank investments in government securities, such a policy measure seems unlikely since maintaining SLR is a mandatory requirement for banks.

``A more prudent measure would be to assign a risk weight tobank investments in government securities more than their SLR requirements, particularly since these are market view-based positions taken voluntarily by banks,'' the report stated.