The market was expecting a secular increase of 25 basis points on all the three measures, but the RBI has chosen to signal its concern on credit growth through a hike only on the repo rate. By giving an inflation target of 5-5.5% the central bank has signalled where its prime concerns lie.

The Indian economy has shown robust growth on the industrial and manufacturing fronts in the third quarter of this financial year, with demand side pressures being seen as the key drivers of inflation at this time. The economy has clocked a GDP growth rate of 9.2% for the second quarter and this sustained strong growth has enabled the central bank to target inflation through higher rates. Apart from inflation and growth, the other factor that the RBI has been looking to control is the credit growth in the economy. The RBI labels credit growth as "clearly excessive" and has often expressed concern over credit in certain sectors. Personal, credit card, real estate loans and loans under capital market exposure have been identified as key concern areas and the provisioning requirements have been increased.

Looking ahead, the lagged effects of monetary policy could be visible by the time the next review comes up. It is still unclear whether we are looking at another hike in the remainder of this year, but the key factors to look out for would be global interest rates, inflation and the RBI’s view on the pace of loan growth as well as credit quality in the system. In this context, the revision of India’s ratings to investment grade by S&P is of significance inasmuch as it enhances India’s ability to attract capital, and could have an important bearing on economic and monetary policy.