Overall Assessment

 Some positive elements in the global economy are (i) the global economy is strong and resilient; (ii)
EMEs, by and large, have a better macro-environment than before; (iii) globally, corporate balance
sheets are strong and less leveraged than in the past; (iv) large financial intermediaries are perhaps
adequately capitalised to absorb the shocks of credit infirmities; and (v) the inflation environment has
been, on the whole, benign. 
 The global environment is fraught with uncertainties with international crude prices at new highs, having
breached the level of US $ 90 per barrel while elevated food and metal prices would, in current
circumstances, pass through to domestic inflation. 
 The US Federal Reserve has been the most aggressive in terms of easing monetary policy, with a
higher than expected rate cut, reflecting the concerns over impact of housing issues on consumption
and, hence, growth.
 The most important issue for India is the possible impact of global financial market developments and
policy responses by central banks in major economies. 
 The immediate task for public policy in India, therefore, is to manage the possible financial contagion
which is in an incipient stage with highly uncertain prospects of being resolved soon.
 On the domestic front, aggregate demand conditions have remained firm and on the uptrend. 
 Key monetary aggregates, i.e., reserve money and money supply have been running well above initial
projections, reflecting the impact of higher than expected deposit growth and the exogenous
expansionary effects of capital inflows as well as the drawdown of fiscal cash balances.
 The incomplete pass-through of international prices of crude, metals, food and commodities in general
to consumer prices is indicative of suppressed inflation which carries destabilising potential into the
future.
 The policy responses in the form of active liquidity management operations to modulate expansionary
monetary and financial conditions were reflected in a generally orderly evolution of market liquidity. 
 Since late July, global financial markets have experienced unusual volatility, strained liquidity and
heightened risk aversion. 
 While the trigger was the rising default rates on sub-prime mortgages in the US, the source of the
problem was significant mis-pricing of risks in the financial system.
 Easy monetary policy, globalisation of liquidity flows, wide-spread use of highly complex structured debt
instruments and inadequacy of banking supervision in coping with financial innovations also contributed
to the severity of the crisis.
 At the current juncture and looking ahead, on the domestic front, the biggest challenge for monetary
policy is the management of capital flows and the attendant implications for liquidity and overall
stability. 
 Yet another challenge is the rapid escalation in asset prices, particularly equity and real estate, which
are significantly driven by capital flows.
 Over the next twelve to eighteen months, risks to inflation and inflation expectations would also continue
to demand priority in policy monitoring.

Monetary Measures

 The Bank Rate has been kept unchanged at 6.0 per cent.
 The repo rate under the LAF is kept unchanged at 7.75 per cent.
 The reverse repo rate under the LAF is kept unchanged at 6.0 per cent.
 The Reserve Bank has the flexibility to conduct repo/reverse repo auctions at a fixed rate or at variable
rates as circumstances warrant.
 The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the
LAF depending on market conditions and other relevant factors. The Reserve Bank will continue to use
this flexibility including the right to accept or reject tender(s) under the LAF, wholly or partially, if deemed
fit, so as to make efficient use of the LAF in daily liquidity management.
 CRR increased by 50 basis points to 7.5 per cent effective fortnight beginning November 10, 2007.
Stance of Monetary Policy
Real GDP growth in 2007-08 is placed at 8.5 per cent for policy purposes, as set out in the Annual
Policy Statement of April 2007 and reiterated in the First Quarter Review.

Policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08 and the resolve,
going forward, would be to condition expectations in the range of 4.0-4.5 per cent so that an
inflation rate of 3.0 per cent becomes a medium-term objective.

Moderating the expansionary effects of net capital flows is warranted so that money supply is not
persistently out of alignment with the indicative projections.

The Reserve Bank will continue with its policy of active demand management of liquidity through
appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and
the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants.

Barring the emergence of any adverse and unexpected developments in various sectors of the
economy and keeping in view the current assessment of the economy including the outlook for
inflation, the overall stance of monetary policy in the period ahead will broadly continue to be:

• To reinforce the emphasis on price stability and well-anchored inflatio n expectations while
ensuring a monetary and interest rate environment that supports export and investment demand in
the economy so as to enable continuation of the growth momentum.

• To re-emphasise credit quality and orderly conditions in financial markets for securing
macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit
penetration and financial inclusion.

• To respond swiftly with all possible measures as appropriate to the evol ving global and
domestic situation impinging on inflation expectations, financial stability and the growth
momentum.

• To be in readiness to take recourse to all possible options for maintaining stability and the
growth momentum in the economy in view of the unusual heightened global uncertainties, and the
unconventional policy responses to the developments in financial markets