Had that been done along with a strong signal of possible hikes down the line in the year, that would surely have affected sentiment across the board. The stock market would surely have taken the cue and the bond markets should have reacted sharply as was speculated until yesterday. The cascading hikes in lending rates would have just followed in train.

However, with just a 25 basis point hike, no one should have anything to complain, including the corporate sector. When overall prices are rising by close to double-digit figures, the Reserve Bank could not have been expected to turn a Nelson's eye to it. The reference to the need for inflation control and the signals that the RBI has clearly given out about its commitment to maintain price stability should have an impact on the inflationary expectations. That is extremely important. Besides, in yesterday's review of the Indian economy, the Reserve Bank has observed that inflation can be expected to be moderate in the coming from its current peak. This is because the earlier inflation trend was mainly driven by food price hike. With more supplies coming into the market, this should soften the overall prices.

For the corporate sector what is also important is that basic bank rate has been left untouched. So one could expected that the lending rates should not rise imminently, even though the other policy rates, namely repo rate and the reverse repo rates have been raised by 25 basis points. The Reserve Bank has not come down heavily on liquidity and the marginal squeeze by taking the cash reserve ratio to 5.75% will draw out just Rs12,500 crore. Once again, such a small reduction in liquidity should not cause any problem for availability of credit for the industrial sector. At any rate, there is some overhang of liquidity in the system. One has to take into account the rising volume of funds flows from overseas. These are not likely to come down drastically any time too soon.

One can clearly see that the Reserve Bank has taken into account its earlier experience with monetary policy tools for inflation control between roughly the middle of 2006 and early parts of 2008. The continued squeeze and the successive hikes in interest all the while during that nearly two-year window did not really achive much by way of inflation control. Instead, it had ushered into a period of industrial slow-down. In 2006, as the Indian economy was clocking an ever highest rate. The process culminated in the negative industrial-manufacturing growth by the end of 2008. Admittedly, the situation was compounded by the worsening global recession.

If one has to speculate why Reserve Bank has taken such a cautious and moderated monetary stance now, it is important to look into the dilemma before the central banker while formulating its stance: On the one hand is the spectre of inflation at 9.9%. On the other hand, India has emerged as the second fastest growing major economy in the world. Obviously, while the policy makers wanted to control inflation, they did not want to stifle the growth process. To understand this, one has to look into disaggregated growth figures. If we then look at the components of India's growth, we see that while the farm sector is sluggish (in fact negative at 2.8%), it is industrial manufacturing sectors which contributed most to the GDP growth. From August 2009, this sector has been growing and since late last the pace has further peaked, reaching highest level at 17.61% in December 2009. Currently, industrial growth is above 15%.

Looking at the user based classification of the CSO, it is the capital goods sector which is showing stellar performance. These groups of industries grew by over 55% in January and currently growing at over 44%. The other segment which is growing very fast is consumer durables sector. Intermediate goods are growing by between 15-20%. This means that overall investment, which is now mainly of the private corporate sector, and consumer demand (for consumer durables) are the driving factors. Again, going by the index of industrial production (IIP) numbers, it is the metals, machinery and equipment transport equipment and manufacturing which are the fastest growing sectors.

One common thread among all these industries is that they are all very sensitive to interest rate hikes. Investment needlessly to say will be critically sensitive to interest hikes as projects financing will go haywire with changes in rates. Consumer durables will be severely affected in case banks start charging higher rates on loan installments. Housing demand similarly will fall.

Thus, if the GDP trends were to be preserved, and even bettered, India must have a flourishing industrial economy in an environment of relatively stable interest regime. One can surmise that these detailed considerations must have weighed with the policy framers while deciding on the stance of monetary policy. It is as if, RBI is betting on growth for taking care of the prices. The little hike that has happened should not cause any worry to the corporate sector since their earnings are now booming. (IPA)