The mid-term review of the credit policy is against the backdrop of soaring commodity prices, as reflected in the CRB Futures price index trading at a 23-year high, and crude playing truant, hovering at around $55 per barrel. These sharp increases expose India's bill composition to substantial inflationary pressures, given the dominance of oil in our import bill.
As recognised in the credit policy, every dollar increase in the price of oil shaves 15 basis points of GDP growth. Against these extraordinary conditions, the task of directing interest rate and monetary policy measures for the second half of the year was indeed challenging.
It is therefore extremely encouraging to observe that RBI has chosen not to ignore price pressure points building into the economy at the cost of pursuing growth.
The focus has clearly shifted to balancing growth with price stability. The policy is replete with inflationary concerns, stemming from supply side bottlenecks which are harder to control and deal with.
This policy is also in accordance with the announcements made in the Union Budget, which laid considerable emphasis on micro financing in the agri and rural sectors, and in taking steps to identify areas for strengthening credit delivery mechanisms.
A few other encouraging announcements include stronger capital adequacy requirements for consumer and home loans and risk management paper geared towards meeting Basel II norms holistically.
We are headed for trying times, with so much uncertainty and skepticism on the horizon. Globally, interest rates have been heading higher - Bank of England has jacked up the short term rates five times since November 2003, while the US Fed has moved three times since June 30.
Therefore, the policy rightly cautions the markets of uncertainties ahead - and rightly so, as where commodity prices will finally settle is unpredictable.
The fresh guidance on year end point-to-point inflation, at 6.5 per cent, is a whopping increase of 150 basis points over the previous guidance. Not surprising that the GDP growth has, as a result, been trimmed by 50 basis points to 6 - 6.50 per cent.
As a regulator with the well-being of the financial markets, RBI has done well to read the early signs of challenge by raising short-term repo rates by 25 basis points, while leaving the broader benchmark "Bank Rate" on hold.
Overall, while price stability considerations have dominated the policy, growth initiatives are being encouraged to ensure undiminished business continuity.
