The RBI stated that while the growth outlook and business climate have weakened, there are upward risks to inflation. The central bank is expected to keep interest rates unchanged and gave little indication of cutting the cash reserve ratio, which disappointed market expectations. The RBI has not changed interest rates since December, after raising them multiple times between March 2010 and October 2011. The key factors for future rate actions will be core inflation and exchange rate pass-through, according to the RBI's quarterly macroeconomic and monetary review released on Monday. Core inflation, which measures price changes in non-food manufactured products, has remained at or above 7 percent for 11 consecutive months, well above its long-term trend of around 4 percent. Contributing to inflationary pressures, the rupee experienced a 16 percent depreciation against the dollar in 2011, leading to increased costs for crucial 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 inflation. However, inflation for manufactured products rose slightly compared to the previous month. The Reserve Bank of India (RBI) mentioned that risks to inflation remain high due to inadequate supply responses, exchange rate fluctuations, suppressed inflation, and a government fiscal policy that promotes spending. The RBI also stated that inflation is expected to decrease to its target of 7 percent by the end of the fiscal year in March. Investments in industrial capacity, which would alleviate supply constraints in India, have been hindered by slow decision-making in New Delhi. Meanwhile, initiatives aimed at boosting the purchasing power of rural Indians have led to an increase in demand for products like protein-rich foods. Could the hope for a CRR cut be over? Indian government bond yields and overnight indexed swap rates decreased on Monday, leading up to the release of the RBI's report, due to speculation that the central bank might reduce the CRR. Out of 20 economists surveyed by Reuters last week, 7 predicted a CRR reduction on Tuesday, while none anticipated a decrease in interest rates. The 10-year benchmark bond yield ended the day 1 basis point lower at 8.17 percent, the one-year swap rate dropped by 8 bps to 7.93 percent, and the five-year rate fell by 3 bps to 7.23 percent. However, some analysts believe that the central bank's review on Monday has reduced the likelihood of a CRR cut on Tuesday. The RBI recognized the significant liquidity tightening since November but stated that liquidity stress has been managed through open market operations (OMOs). This suggests that the RBI may continue to use OMOs to provide rupee liquidity instead of immediately reducing the CRR due to potential risks to inflation. A senior trader at a foreign bank noted that Monday's statement seemed to rule out a CRR cut, which could negatively impact bonds on Tuesday. Despite this, some still believe that a CRR cut on Tuesday is a possibility. 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. It emphasized the importance of ensuring that liquidity deficits are kept within acceptable limits to facilitate the smooth functioning of other markets. The RBI also noted that it anticipates an improvement in growth in the upcoming fiscal year, but cautioned that slow recovery may persist due to weak investment and external demand. It attributed the weakened growth outlook to unfavorable global and domestic factors.