By raising the key policy rates by a moderate 25 bps each, the RBI has reasserted its anti-inflationary stance without losing focus on growth. Taking a firm action on inflation was, however, warranted by rising demand-side pressures as reflected in rapid bank credit growth, robust corporate sales, rising input and output prices and buoyancy in tax revenues.

In the RBI's assessment, the current growth-inflation dynamics for India suggests that the balance of risk has tilted towards intensification of inflation. At the same time, the central monetary authority wanted its action to be moderate enough as not to disrupt the growth momentum. To ensure sufficient availability of loanable funds to productive sectors, the RBI has extended the additional liquidity support to banks under the LAF (up to 1 per cent of NDTL) and the second LAF window from January 28 to April 8.

Growth opportunities

The policy document offers an excellent and succinct summary of the state of Indian economy, emerging risks and growth opportunities and resulting policy challenges.

While today's policy action was along the expected lines, the RBI has sensitised the market players about the emerging risks in the months ahead in the form of translation of food inflation into generalised inflation, intensification of domestic demand pressures, widening of current account deficit, slowdown in inward FDI flows and likely pressures on fiscal balances.

The RBI's overall optimism for growth, despite growing inflationary concerns, would go a long way in improving the comfort level of international investors.

(The author is CMD, Bank of Baroda.)

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