The Reserve Bank of India (RBI) has stated that the growth outlook and business climate have weakened, while also cautioning about potential inflation risks, just a day before the expected decision to maintain interest rates. The RBI has not shown any indication of reducing the cash reserve ratio (CRR), which could disappoint market expectations. The RBI had kept interest rates stable in December after increasing them numerous times between March 2010 and October 2011. The RBI emphasized that future rate decisions will be influenced by core inflation and exchange rate pass-through in its quarterly macroeconomic and monetary review on Monday. Core inflation, which tracks price changes in non-food manufactured products, has remained at or above 7 percent for 11 consecutive months, well above its usual trend of around 4 percent, according to the RBI. Contributing to inflationary pressures, the rupee depreciated by 16 percent against the dollar in 2011, leading to increased costs for essential imports like oil. Headline inflation, as indicated by the wholesale price index, decreased to a two-year low of 7.47 percent in December due to a significant drop in food prices. However, inflation for manufactured goods rose slightly compared to the previous month. The RBI warned of potential risks to inflation from inadequate supply responses, exchange rate fluctuations, suppressed inflation, and an expansionary fiscal policy. They anticipated that inflation would gradually decrease to their target of 7 percent by the end of the fiscal year in March. Investment in expanding industrial capacity to alleviate supply constraints in India's third-largest economy has been hindered by slow decision-making in New Delhi, while initiatives aimed at boosting the purchasing power of rural Indians have driven up demand for products like protein-rich foods. Hopes for a CRR cut in India were dashed as government bond yields and overnight indexed swap rates eased on Monday. Expectations for a CRR cut were growing before the release of the RBI's report, with 7 out of 20 economists polled by Reuters last week anticipating a cut. None of the 22 economists expected a cut in interest rates. The 10-year benchmark bond yield closed 1 basis point lower at 8.17 percent, the one-year swap rate settled 8 bps lower at 7.93 percent, and the five-year rate dropped 3 bps to 7.23 percent. Some market analysts believe that the central bank's review on Monday may have decreased the likelihood of a CRR cut on Tuesday. The RBI acknowledged the liquidity tightening since November but mentioned that liquidity stress was managed through OMOs. This suggests that the RBI may prefer to continue using OMOs to inject rupee liquidity rather than immediately reducing the CRR due to inflation risks. A senior trader from a foreign bank suggested that Monday's statement indicated no CRR cut, which could be negative for bonds on Tuesday. However, some still believe that a CRR cut on Tuesday is possible. The central bank stated that although open market operations have been its preferred method for dealing with tight market liquidity, it is willing to consider other measures if necessary. Ensuring that the liquidity deficit stays within acceptable limits to support the smooth operation of other markets is also a priority. The RBI anticipated an improvement in growth in the upcoming fiscal year, but noted that sluggish investment and external demand could hinder a speedy recovery. It acknowledged that the growth prospects have been affected by negative global and domestic factors.