A 20% y-o-y rise in money supply is another area of concern. Accompanied and induced by high credit growth, growth in money supply is possibly higher than warranted which leads not only to inflation but potential for rising NPAs also.

As per latest available data, the money multiplier (ratio of broad money to reserve money) stands at 4.88, as compared to 4.76 as on March 31, 2006. While 4.88 is quite high, it would have touched 5.00 without the CRR hike effected by RBI recently.

RBI has adopted a three-pronged approach (a) a measured increase in interest rates to assuage demand pressures (b) precautionary provisioning and enhancement of risk weights to advances to specific sectors in which banks' exposures have been rising at a fast pace to ensure quality of credit (c) manage the capital inflows having expansionary effects carrying potential inflationary pressures.

To sum up:

* RBI has tried to balance conflicting monetary policy objectives of growth versus stability (including price stability).

* A hike in repo rate and not in reverse repo clearly indicates that RBI would like to curtail inflation and money supply without compromising on growth. In a scenario of liquidity shortage, banks need to ensure that growth in credit would be commensurate with deposit growth. Thus banks would be required to depend on their own balance sheet (deposit route), rather than on the RBI Balance sheet (repo route) for funding credit growth.

* As an effect, while short-term rates will remain high, even long term rates might move higher. There will be volatility in the market, till liquidity flows in through FC resources and government expenditure.

* The increase in provisioning requirement to 2% for standard assets in the real estate sector, outstanding credit card receivable, loans and advances for capital market exposure and personal loan will make the banks to increase the cost of such credit for the borrowers.

* The increase in provisioning requirement to 2% and risk weight to 125% for banks' exposure to the non-deposit taking systemically important NBFCs will compel the banks to increase the cost of credit to such borrowers.

* The reduction in interest rate in FCNRB and NRE deposits will make it slightly unattractive to the depositor and as a result, the flow of such deposits is expected to slow down.

* Overall, market borrowing rates by banks and corporate would remain high irrespective of the G-Sec rates