The "bank rate", used to price medium and long-term loans, and the CRR remain unchanged at 6.0% and 5.5% respectively, indicating that the RBI doesn’t feel the need to tinker with these rates as the effect of the earlier increases in these rates are yet to be fully realised. At the moment, the performance of the economy and robust capital inflows are contributing to sustaining the inflation rate to 5-5.5% which is deemed to be manageable by the RBI. The marginal increase in repo rate, commensurate increase in spread to 150 bp and higher risk weights and credit provisioning in real estate, housing & consumer credit, is a potential deflationary measure in the event of speculative asset growth and adverse developments in various sectors of the economy, thereby impacting liquidity.

The domestic economy continues to deliver with a 9.2% increase in real GDP. Net capital inflows were higher due to an increase in FDI and through debt flows. Portfolio investment has slowed down markedly. Foreign exchange reserves have improved during the period and while the merchandise trade deficit has widened, the sustained surplus on account of invisibles has reined in the current account deficit to well under 2% of GDP.

Hence, the current measures undertaken by the RBI can be viewed as complementary to measures undertaken by the central government through amendments in fiscal policies and to the lagged effect of measures already undertaken by the RBI itself. However, continued demand-led growth, rapid expansion in real estate lending and asset price inflation will reinforce the prospect of a reverse repo rate hike soon, as also other administrative measures towards some monetary tightening to ensure financial and price stability in the medium term.

What to watch out for: Reaction of markets to higher risk weights & credit provisioning in "growth" sectors.