True to its tradition the Reserve Bank of India (RBI) has once again surprised the market. Looking at the Fed rate cut by an unprecedented 75 basis points, and the overall slowdown witnessed in industrial growth during the current year from 11.6 to 9.2% and a fall in growth in non-food credit, India Inc. anticipated a cut in domestic interest rate by the RBI. But the RBI has left all policy rates unchanged at its quarterly review of the Credit Policy. The RBI has, of course, its own reasons: it expects the GDP growth in 2007-08 to be maintained at around 8.5% subject to no further escalation in international crude prices and barring domestic or external shocks.

The RBI has, of course, its own reasons: it expects the GDP growth in 2007-08 to be maintained at around 8.5% subject to no further escalation in international crude prices and barring domestic or external shocks; economy will continue to grow at the same rate even in FY09 despite global slowdown; and the modest deceleration in output growth witnessed in the second and third quarters of FY08 shall be taken care of by the ongoing investment boom as reflected in the sustained demand for domestic and imported capital goods.

Driven by this philosophy, the RBI stayed focused on managing inflation and liquidity risks. According to the RBI, the growth in money supply increased by 22.4% on a year-on-year basis, which is well above the projected trajectory of 17.0% to 17.5% indicated in the 2007-08 Annual Policy Statement. Reserve money too increased by 30.6% on a year-on-year basis as on January 18, 2008 as against 20% prevalent a year ago. Thus, liquidity management has become its prime concern so that it could contain inflation close to 5.0% in fiscal 2008, while "conditioning expectation in the range of 4.0 to 4.5%", so that inflation can be maintained at around 3% as a medium-term objective.

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