In his recent review, the Governor of Reserve Bank of India, has opted for a tight monetary policy. Indian inflation has both supply side and demand side issues to tackle. While long-term fiscal measures are needed for supply side issues, the RBI's ability to manage larger money supply through its monetary instruments is proving to be less effective in a globalized financial environment.

The Governor of Reserve Bank of India Y V Reddy, in his first quarter review of Annual Monetary Policy (2008-09), has, in fact, opted for a tighter monetary policy in the context of rising inflation and falling growth.

According to him, the critical inflation will persist for some time due to the shortage in global supply of and rise in demand for food items. Any improvement in the situation depends on expectations of better monsoon. As farm production in India depends on rain god, one cannot be sure of any substantial improvement.As regards the GDP growth, it has exhibited signs of slowing down, principally in the industrial sector. There is nothing to cheer about the performance of the infrastructure industries either.

The corporate sector is reeling under the burden of higher interest rates and rising overheads due to the general price rise, thanks to the double digit inflation. Even the IT sector's profitability has marginally declined. Corporates with good credit rating are able to rely significantly on external sources of funding in the context of lower retained profits. But the business expectations indicies are lower for corporates.

Business optimism unsurprisingly is on the decline with the rise in input costs and higher interest rates, besides global economic instability. Perhaps, the service sector provides a silver lining for the otherwise dark clouds with satisfactory performance of communications, railways and civil aviation. While private final consumption expenditure in nominal terms has marginally declined, gross fixed capital formation has raised significantly.

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