The RBI has maintained a dovish stand for future hopes of a rate cut. "Headline inflation has been below the Reserve Bank's projected levels over the past two months. The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months. In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," it has said in a release.
India's central bank is often bogged down by high inflation rates in the economy. If it cuts rates, it could spur growth, but, also push inflation higher. In India the WPI inflation for November came in at a staggering 7.45%. This is certainly high and not in the comfort zone of the RBI. In fact, India's central bank governor, D Subbarao has made it abundantly clear that he wishes to tame inflation, while growth would remain secondary. If one goes by the consumer price index, it is at 9.9% for November, which is almost into double digits.
"The biggest risk to the outlook stems from political economy considerations that could impede, delay or erode resolute policy action. The consequences could be deepened financial stress and heightened risk aversion. For EDEs, the threat of spillovers remains significant in view of the depressed outlook for global trade and volatile capital flows. Although inflation pressures appear to be moderating, elevated food and commodity prices remain contingent risks, especially for EDEs facing domestic supply constraints," the RBI has stated.
The RBI will meet again on January to decide on policy action.