The wholesale price index-based inflation, though still under double digits, is rising.

It is clear from the table that inflation is owing to a rise in prices of all three categories. However, primary articles (weightage of 32.29 per cent) have shown the maximum increase. Of them, food and vegetables are the main contributors to inflation. Price rise in the fuel power and lube segment has also been above average. Inflation has been kept under check by prices of manufactured products.

Price rise in food articles has been mainly on account of supply constraints. Power prices are regulated,and are not dependent on market forces. Oil prices have continued to be low. This leads to the conclusion that inflation is primarly owing to supply constraints rather than money supply being above target or demand being buoyant. But there is cause for optimism. There has been a price rise in manufactured products. This is contrary to the world trend, where prices of traded products have been falling on account of economic problems of Asia (for example, China, Taiwan and India). The uptrend is small, indicating slight recogery, and should not cause concern.

After the Asian crisis, world growth estimates have been cut by 0.50 per cent to 1.5 per cent. The world is facing overcapacity in most commodity products. Commodity prices are at their historic lows. Developed economies are trying to increase demand through rate cuts. The credit policy has left repo rates, bank rates and cash reserve ratio (CRR) untouched. This is justified as in India, monetary expansion has exceeded targets significantly. In normaltimes, this could have been a cause for concern. India should be seen as a part of the bigger picture, and given the global slowdown, the RBI has just reviewed the situation. Monetary expansion is clearly not boosting demand growth.

The credit policy addresses the problem of higher non-performing assets (NPAs) by increasing provisioning requirements even for standard areas. It has made NPA-recognition norms more stringent. Though higher provisioning will reduce bank profits, bank stocks' discounting in the capital market will improve. The RBI continues to view CRR as a tool for monetary control. Given the rising capital-adequacy requirements, a time table for which has been laid down, it would have been encouraging to have a similar time table for reducing CRR to a certain level. This will help banks generate a better return on funds capital.

The author is SBI Capital Markets managing director