Words of caution

"Global imbalances and the possibility of disruptive currency movements, firming up of commodity prices, transition to high interest rates and the uncertain prospects of soft landing of China's economy continue to be some of the major uncertainties and risks facing the global economy," says the RBI report.

At the same time, it points to the robust export performance and says that India's current account surpluses are here to stay despite any acceleration in imports on account of the industrial recovery.

In another part of the report, while the RBI admits that the level of foreign exchange reserves is "comfortable at present," it also lists out several reasons why "a careful and continuous reassessment of the adequacy of reserves" is called for.

This sense of heightened risk is also reflected in the central bank's assessment of the domestic economy, with the monsoons obviously a major reason for the disquiet.

While it takes note of the sustained recovery in industry, the booming services sector, and the improved investment climate, it also talks of the slowdown in production of consumer goods.

On the real economy, the report concludes that, while the risks "impart an element of downward bias to the estimates of GDP growth made at the beginning of the year, (the) evolving strengths during the rest of the year may restore the position and, in any case, India will continue to be among the top performers globally."

In two areas, however, the RBI seems to have more or less made up its mind. On the price front, the report acknowledges the recent surge in prices and lists crude oil and non-fuel commodities as major contributing factors.

It's conclusion: "The outlook for headline inflation is, on current indications, less optimistic than what was envisaged at the beginning of the year." That leads one to interest rates, where the central bank says, in no uncertain terms, that "the northward movement of international interest rates is likely to have some impact on domestic interest rates and financial markets would have to manage these challenges."

This forthright assessment may hold the key to the entire Annual Report. In essence, by listing all the uncertainties in the current economic environment, the RBI appears to be preparing the markets for change.

The message seems to be: the economy has been chugging along quite well so far, but there are plenty of downside risks involved, risks which cannot be quantified at the present moment.

So it would serve market participants well if they were to be careful and prepare themselves for any eventuality. In short, the report clearly tells banks that caution should be their watchword in these uncertain times.