The maintenance of price stability has always been one of the two key objectives of monetary policy, the other being the assurance of credit availability to the real economy. On the eve of the RBI's third quarterly review of the monetary and credit policy a comparatively recent innovation enabling the central bank to communicate more frequently it was abundantly clear that inflation would dominate the discourse. In its review, the RBI had spelt out the dimensions of the inflation problem that overshadows all other macroeconomic concerns in India today. Headline inflation based on the wholesale price index (WPI) went beyond 6 per cent on January 13 from 4.2 per cent last March and 4.2 per cent a year ago. What makes the situation politically sensitive is that consumer price inflation has remained higher than the WPI inflation, reflecting the higher price of food and other articles of everyday consumption. Very recently, the Government sought to mitigate the supply side pressures by permitting liberal imports of certain commodities. At a time the economy is growing at 9 per cent on the back of a strong industrial performance, it is unlikely that domestic output can be stepped up further immediately. The pursuit of price stability naturally calls for demand side correctives too.

The question was not whether the Reserve Bank would raise interest rates but how. Keeping its resolve to rein in inflation within the earlier target range of 5-5.5 per cent, the RBI has raised the repo rate by 0.25 percentage point to 7.50 per cent leaving all other rates the reverse repo rate, the bank rate, and the cash reserve ratio unchanged. The repo rate is the rate at which the RBI lends to banks against securities, while the reverse repo rate is the rate at which it absorbs funds. Most central banks around the world rely on these short-term liquidity-altering measures. In India however the central bank additionally had to hike the CRR by 0.50 percentage point in December to impound some Rs.13,500 crore of bank deposits. Despite these restraints, bank credit has continued to grow at more than 30 per cent for the second year in a row. Hence the RBI has sought to make certain types of loans more expensive. They include loans to real estate, credit card receivables, the share market and most types of personal loans. The incentives available to non-resident deposits are being reduced. Clearly the package of monetary measures to moderate inflation is in for a change. The RBI has revised its GDP growth forecast for the year as 9 per cent, up from its earlier forecast of 8.5 per cent and the 8 per cent figure it put out at the beginning of the year.