Keeping in mind the borrowing requirement of the government and of the commercial sector in the remaining period of FY10, the indicative projection of money supply growth of 18 per cent set out in July 09 has been revised downwards to 17 per cent. In view of the poor credit off-take, the RBI has lowered its indicative non–food credit growth figure from 20 per cent to 18 per cent. Banks have been urged once again to step up their efforts towards credit expansion while maintaining credit quality which is critical for revival of growth. As regards the Government borrowing programme, the Central Government has already completed net market borrowing of 80.4 per cent of the budget estimate. The RBI has thus re-emphasised that given the current level of liquidity, it should be possible to complete this borrowing programme smoothly.

Turning to the growth inflation trade off, GDP growth projection has been left unchanged at 6 per cent with an upward bias.

The emergence of WPI inflation to positive territory at a rapid clip has been led by food inflation. The inflation forecast has been increased from 5 per cent to 6.5 per cent with an upside bias. The divergence between CPI and WPI has been underscored, as also the fact that it further complicates inflation assessment. We expect that WPI inflation will inch up to 6.5 per cent by end FY10 due to base effects, some demand side revival restoring pricing power along with supply side pressures. By this time we expect a CRR/MSS led sterilisation of excess liquidity created when the RBI intervenes to stem the appreciation of the rupee exchange rate in the wake of copious capital inflows that we anticipate.

On the whole, this is a fairly hawkish statement that underscores the upside risks to inflation, stresses the management of inflationary expectations and has the potential to nudge borrowing costs higher in specific sectors like real estate.