Last Friday, Ministry of Finance had indicated that the monetary authorities were expected to take action on the demand side to moderate inflation and quell inflationary expectations.

Reserve Bank of India has hiked the REPO rate by 50 basis points and the CRR by 50 basis points (in two stages). These steps are expected to have a salutary effect.

These steps are necessary in the face of rising inflation due to relentless increase in crude oil prices. On June 20, the trading day preceding the Jeddah meeting, crude oil price on the NYMEX was US$134.63 per barrel. This morning, it is US$136.80 per barrel.

On the positive side, as Minister of Agriculture has noted, we have very satisfactory stocks of wheat and rice; adequate supplies will be provided to the PDS; and stocks will be sold in the open market, when necessary, to restrain prices.

As the RBI's statement points out, demand is still high (non-food credit growth was 26.2 per cent as on June 6, 2008); there is a reasonable supply-demand balance; there is improvement in domestic agricultural performance; the external sector is strong and resilient with modest current account deficits; and the level of foreign exchange reserves is comfortable.

The objective of the RBI is to moderate and manage aggregate demand. The intention is to achieve the objective while ensuring that the prospects for overall economic growth remain positive. The policy stance adopted by the RBI should boost the confidence of investors both domestic and foreign, and augur well for economic growth.

*******

BSC/SS/GN-161/08

Monetary tightening: central bank raises lending cost to moderate inflationary pressures and manage aggregate demand for stability. The Ministry of Finance described a monetary tightening-an increase in the repo rate and a staged rise in the cash reserve ratio-designed to moderate inflationary pressures from rising crude oil prices by restraining high non-food credit growth and managing aggregate demand, while noting adequate food stocks and a resilient external sector to support price stability and growth.