The Reserve Bank of India has surprised the financial markets with a rather muted increase in the policy interest rates — the repo and the reverse repo — and the Cash Reserve Ratio. Each of these is to go up by an identical 0.25 percentage point. On the eve of the policy statement, there were expectations that the hikes would be of a higher magnitude. Indeed, the RBI's recent reports on the economy including its policy-eve macroeconomic assessment clearly focussed on inflation and price stability suggesting a strong, concerted action against inflation. However, the policy statement strikes a fine balance between the needs of economic growth and price stability, even while taking into account certain special factors such as the huge government borrowing programme on the anvil. Economic recovery is becoming more broad-based, thanks to a strong showing by the industrial and service sectors. There has been a sustained increase in bank credit and in the financial resources raised by the commercial sector from non-bank sources. The economy has been resilient in the face of deficient monsoons during the second half of last year. In the circumstances, the RBI's projected GDP growth rate of 8 per cent, with an upward bias, for 2010-11 appears cautious but is consistent with the central bank's conservatism.

The baseline projection for WPI inflation for March 2011 is 5.5 per cent. That will pose significant challenges to monetary policy. Having breached the RBI's revised target of 8.5 per cent for March 2010, WPI inflation is currently poised to enter double digits. While the hope is that inflation will moderate over the medium-term, there are significant risk factors affecting both inflation and growth. Chiefly, the rising petroleum and commodity prices as well as the uncertainty about the pace and shape of global recovery and about the performance of 2010 south-west monsoon are expected to weigh down economic growth. The strong rupee appreciation is threatening the just-recovering exports as well as those who compete with imports in the domestic market. Among the non-monetary announcements, great significance is attached to the impetus given to infrastructure companies. Financial sector architecture will be improved through a new reporting platform for commercial paper and certificates of deposit. Foreign banks that are eager to expand in India will have to wait a little longer for some important clarifications. The RBI is to prepare a discussion paper on the mode of their presence by September 2010. New bank licences will be awarded only after due deliberations on another discussion paper to be got ready by July.