The strong message that comes through from Y.V. Reddy's second credit policy statement as RBI governor is one of caution. This is a 'on-the-one-hand-on-the-other-hand' statement of policy for which central banks are justly famous. The RBI's estimate of GDP growth for the year, which it had to revise down to 6-6.5 per cent following the bad monsoon, was tentative to say the least. And even its move to raise the repo rate (the interest rate at which it sucks out money from the banking system) by 25 basis points upwards, was, say analysts, more of a signalling step than one of any major consequence as far as the money market is concerned.

"The call money rate was already on the way up and had risen by around 50 basis points in the last 3-4 months," points out Saumitra Chaudhary, chief economist at ICRA. "So liquidity was already tightening. I wasn't expecting the central bank to raise the rate." The market too wasn't expecting a rate cut - a poll by Reuters of economists showed that a majority of them expected rates to stay where they were. "I think this measure is more to signal to the market that the central bank was serious about fighting inflation," says Chaudhary.

The main reason why the RBI is so cautious is global oil prices. In internal estimates, the RBI has found that if the entire increase in international oil prices since January (by around 66 per cent) were to be passed on to domestic customers, the current inflation rate, which is around 7.1 per cent, would have been higher by around 2.2 percentage points. That's uncomfortably close to double digit inflation, something that India has not seen since 1994-95 (in terms of the annual average inflation rate). The RBI, in its earlier policy statement in May, had estimated the year to end with an inflation rate of around 5 per cent. It has revised that estimate up to 6.5 per cent. Worse, it points out that though the domestic impact of higher international oil prices has been moderate so far, this situation might not continue given that "...[The] headroom available for absorbing the burden both by the fisc and oil companies gets progressively reduced". And if the RBI, in anticipation that the inflation rate could head higher in the future, did go ahead and raise the bank rate or the cash reserve ratio, it risked nipping a nascent recovery in industrial credit in the bud.

The RBI has also cracked down on housing loans. In the policy, the central raised the risk weight on housing loans from 50 per cent to 75 per cent, which means that banks have to set aside more capital than before for each housing loan they make. This, it says, is intended as a 'temporary counter cyclical measure' because of the strong growth in home loans.

At the same time though, the central bank has provided additional housing loan sops to banks by allowing them to classify all their housing loans as priority sector lending to "improve the flow of credit to the sector".