The annual announcement of monetary and credit policy by the Reserve Bank of India has come amid a rather complicated macro-economic situation.
Growth and inflation appear to be pulling in opposite directions, the former indicating a loosening of the purse-strings, the latter a tightening.
The inflationary pressure itself is clearly from the supply side, not directly amenable to control by traditional monetary policy instruments.
Despite these reservations, the RBI had increased the cash reserve ratio by 50 basis points on April 17 to appease concerns about inadequate responses to inflation, however inappropriate these responses might be.
So the expectations from Tuesday's package veered towards a hike in the repo rate, the stronger of the two instruments that the RBI has used of late, although there was a significant view that this would not be done in recognition of the concerns about growth.
In the event, the RBI has hiked the CRR a further 25 basis points but left its benchmark interest rates unchanged.
While this has surprised the markets, which have reacted with relief, the question is whether this is an appropriate response to the current circumstances.
Most definitely, yes. This newspaper had advocated maintaining the status quo on interest rates on the grounds that a hike would do more harm to growth than it would help control inflation. Inflation today is a truly global phenomenon and no individual government can claim to be able to control it fully.
However, the recent measures by the government, comprising customs duty cuts and restrictions on exports, will probably be effective in reining in price increases in the short term.
In fact, even as the monetary policy was being announced, the finance minister announced further measures in Parliament, imposing export duties on steel products and raising the duty on higher-priced