Cash Reserve Ratio is the ratio of interest-free cash reserves mandatorily kept by the banks with the RBI, which had it been unchanged could have provided banks an option to ease the lending rates.

It, however, left the key lending and borrowing rates (repo, reverse repo) and bank rates unchanged.

Unveiling the busy season monetary policy, RBI Governor Y V Reddy sent strong signals that the apex bank's hawkish stance would continue in order to ensure price stability, credit quality and orderly conditions in the financial market.

Inflation has now come down to 3.07 per cent.

Between December 2006 and July 2007, RBI has raised CRR by 2 percentage points to 7 per cent and has sucked out about Rs 56,000 crore (Rs 560 billion) from the financial system.

Leaving the economic growth projection unchanged at 8.5 per cent, RBI continued to focus its attention on keeping inflation low notwithstanding the fact that interest rates have begun to impede the growth momentum.

Though inflation has come down to 3.07 per cent, RBI expected it to be in the vicinity of 5 per cent by end of 2007-08.

But going forward, it resolved to contain inflation expectations in the range of 4-4.5 per cent so that an inflation rate of around 3 per cent becomes a medium term objective.

Highlighting several challenges facing the conduct of monetary policy, RBI said on the domestic front management of capital flows, related liquidity implications and overall stability were biggest challenges.

Yet another challenge was rapid escalation in asset prices, particularly equity and real estate, driven by capital flows which are often opaque, highly leveraged and largely unregulated, the RBI observed.

"Monetary policy will have to contend with the risks to overall macroeconomic stability and threats to inflation expectations emanating from fluctuations in asset prices, the re-pricing of risks and their diffusion across the financial system," it said.

It observed that the momentum in investment has been affected by changes in the interest rate cycle and spending on capital expenditure and infrastructure has weathered the transient slack in industrial activity in the second quarter.

Key monetary aggregates like the reserve money and money supply have been running well above initial projections, it said.

Asset prices remain at elevated levels although there is some anecdotal evidence of stabilising real estate prices, the RBI said.

The apex bank said equity prices were at record highs and although inflation, in terms of wholesale prices appears to have eased, remains high in terms of consumer prices.

To curb the menace of recovery agents, RBI has asked banks to prescribe to specific considerations while engaging recovery agents.

"An urgent need has risen to review the policy, practice, procedures involved in engagement of recovery agents by banks in India," it said.

The Monetary and Credit Policy 2007-2008