"Am I correct to assume that the BIOS has to be set up so that the system boots from the primary master ?"
Yes. /dev/hda is the primary master ide device.
"I am also worried whether loading GRUB onto the MBR in the /dev/hda (primary master) would lead to any complications in booting the windows xp and also in future reinsallations, if any, of windows xp in the primary master
or of red hat 9 in the primary slave.."
GRUB should be able to load XP. Just don't make the mistake of installing directly to XP's partition (maybe /dev/hda1)
Reinstalling Windows will erase GRUB (or whatever's in the MBR). You'll have to reinstall GRUB. You can back it up using the 'dd' command: 'dd if=/dev/hda of=/grubmbrbackup.b bs=512 count=1'
This way you'll just copy it back instead of reinstalling it.
"Do I need to take any precautions like disabling the system restore in windows xp etc"
Not sure, but don't think so.
"I was going through some old posts and wondering whether it would be better to boot to 2 different operating systems in the 2 hard disks by changing the hard disk priority in the BIOS..But then I don't know where to
place the boot loader in that case during installation?"
If you want to do this, you should probably install GRUB to /dev/hdb.