The Reserve Bank of India (RBI) stated that the growth outlook and business climate have deteriorated, while also cautioning about the possibility of inflation increasing. Despite market expectations of a rate cut, the RBI did not hint at reducing the cash reserve ratio (CRR) that banks must maintain with the central bank. The RBI had kept interest rates stable in December after multiple increases between March 2010 and October 2011. The RBI emphasized that future rate decisions will depend on core inflation and the impact of exchange rate changes. Core inflation, which tracks price changes in non-food manufactured goods, has remained at or above 7 percent for 11 months, well above its typical rate of around 4 percent. Contributing to inflationary pressures, the rupee depreciated by 16 percent against the dollar in 2011, leading to increased costs for essential imports like oil. Despite a decrease in annual headline inflation to a two-year low of 7.47 percent in December due to a significant drop in food prices, manufactured product inflation saw a slight increase. The RBI mentioned that there are still risks of inflation from various factors such as limited supply responses, exchange rate fluctuations, suppressed inflation, and an expansionary fiscal policy. They predicted that inflation would likely reach their target of 7 percent by the end of the fiscal year in March. However, investment in industrial capacity to address supply constraints in India has been hindered by slow decision-making in the government, while initiatives to improve the purchasing power of rural Indians have led to higher demand for foods like protein-rich products. Expectations of a possible reduction in the CRR by the Indian central bank led to a decrease in government bond yields and overnight indexed swap rates on Monday, prior to the release of the RBI's report. Out of 20 economists surveyed by Reuters, 7 predicted a CRR cut while none anticipated a decrease 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 by 3 bps to 7.23 percent. However, some analysts believe that the central bank's review on Monday may have lessened the likelihood of a CRR cut on Tuesday. The RBI acknowledged the significant liquidity tightening since November but stated that they have managed liquidity stress through OMOs. This suggests that the RBI may prefer to continue infusing rupee liquidity through OMOs instead of immediately reducing the CRR, due to concerns about inflation. A senior trader at a foreign bank noted that Monday's statement seemed to rule out a CRR cut, which could have negative implications for bonds on Tuesday. Despite this, some still believe that a CRR cut on Tuesday is possible. The central bank stated that although open market operations have been its primary method for dealing with tight market liquidity, it is open to considering other measures if necessary. It emphasized the importance of ensuring that liquidity deficits remain at acceptable levels to support the smooth operation of other markets. The RBI also mentioned that it anticipates an improvement in growth in the upcoming fiscal year, but noted that slow recovery may persist due to weak investment and external demand. It attributed the weakened growth outlook to negative global and domestic factors.