While the Reserve Bank’s objective was to achieve stable money-market interest rates in volatile financial conditions, this did not preclude moderate variations in the repo rate around the 11.75% level. Stable money-market interest rates were regarded as desirable to restrain volatility. In the circumstances, a rise in rates would have failed to counter the effects of the supply-side shocks on domestic prices.
Moreover, a number of other factors indicated that the upside risks for inflation would probably be short-lived. Developments such as modest increases in nominal unit labour costs, 5  BIS Review 71/2000  fiscal discipline, excess production capacity, low growth in money supply and bank credit extension and a prudent monetary policy stance, pointed to a favourable long-term inflation outlook.