On the eve of the annual monetary and credit policy statement, there was hardly any doubt that inflation concerns would continue to dominate the policy discourse. Less clear, however, were the strategies the Reserve Bank of India was going to adopt. In the event, a hike in the CRR by 0.25 percentage point, leaving the policy rates unchanged, is the strongest evidence that the RBI is keen on maintaining continuity in its objectives. Price stability has become the key objective in all its recent policy statements, even if that meant a somewhat lower emphasis on growth. For four weeks in a row, inflation has remained at over 7 per cent, far above the RBI’s target of 5 per cent. The government has implemented a number of measures, both fiscal and administrative, to ease the supply of some commodities that are critical to moderating the current spell of inflation. By way of supplementing those measures and also to underline the relevance of monetary policy in the battle against inflation, the RBI hiked the CRR by 0.50 percentage point just 10 days ago. After this revision, the applicable CRR will be 8.25 per cent from May 24. An estimated Rs.27,000 crore would be pulled out of the bank-lending system in three stages. The repo and reverse repo rates remain unchanged at 7.75 and 6 per cent respectively. Obviously at a time when there is excess liquidity, banks have not been borrowing from the RBI. A general liquidity tightening through a CRR hike will force banks to frame their own interest rate strategies instead of being nudged through a repo rate change.

Apart from according high priority to price stability and anchoring inflationary expectations, the monetary policy emphasises orderly growth in financial markets and simultaneously maintaining the overall growth momentum. These are inter-related objectives. There is heightened concern over the likely fallout of the turmoil in the financial markets abroad. So far, only the equity markets have been affected adversely but there are fears that the serious crises in some other markets, notably the credit markets, will spill over. In any case, the financial market turmoil has created a far greater uncertainty over the quantum and direction of portfolio and other inflows. The RBI projects a growth rate of between 8 and 8.5 per cent for 2008-09. In the context of the current slowdown, the central bank may seem to be overly optimistic. Its goal of bringing inflation down to 5.5 per cent during this year and to around 3 per cent over the medium-term indicates the direction in which monetary policy would be heading.