The Reserve Bank of India (RBI) stated that the growth outlook and business climate have deteriorated, while also cautioning about potential inflation risks, just a day before it is expected to maintain interest rates. The RBI also suggested that it is unlikely to reduce the cash reserve ratio (CRR), which disappointed some market expectations. In December, the RBI chose not to change interest rates after increasing them 13 times from March 2010 to October 2011. The RBI emphasized that future rate decisions will depend on core inflation and exchange rate pass-through in its quarterly macroeconomic and monetary review on Monday, noting that core inflation has remained high for nearly a year. Contributing to rising inflation, the rupee depreciated by 16 percent against the dollar in 2011, increasing the cost of essential imports like oil. Headline inflation, as indicated by the wholesale price index, reached a two-year low of 7.47 percent in December due to a significant drop in food prices. However, the inflation rate for manufactured goods rose slightly compared to the previous month. The RBI warned of potential inflation risks from inadequate supply responses, currency exchange rate fluctuations, suppressed inflation, and a fiscally expansionary approach. The RBI predicted that inflation would likely decrease to its target of 7 percent by the end of the fiscal year in March. Slow decision-making in New Delhi has hindered investment in industrial capacity, which would help alleviate supply constraints in India, the third-largest economy in Asia. Additionally, initiatives aimed at boosting the purchasing power of rural Indians have led to increased demand for protein-rich foods. Indian government bond yields and overnight indexed swap rates decreased on Monday as there was speculation that the RBI might reduce the CRR. Out of 20 economists surveyed by Reuters, 7 predicted a CRR reduction on Tuesday, while none expected an interest rate cut. The 10-year benchmark bond yield ended 1 basis point lower at 8.17 percent, the one-year swap rate dropped 8 bps to 7.93 percent, and the five-year rate fell 3 bps to 7.23 percent. However, according to some analysts, the central bank's review on Monday seemed to decrease the likelihood of a CRR reduction on Tuesday. The RBI acknowledged a significant tightening of liquidity since November, but mentioned that liquidity stress had been managed through open market operations (OMOs) instead of reducing the CRR immediately. This has led some experts to believe that the RBI may continue to conduct OMOs to inject rupee liquidity rather than cutting the CRR in the near future. A senior trader at a foreign bank noted that Monday's statement indicated a lack of CRR cut, which could have a negative impact on bonds on Tuesday. Despite this, others still see a CRR cut as a possibility on Tuesday. The central bank stated that although open market operations have been its preferred 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 within acceptable limits to facilitate the smooth operation of other markets. The RBI also projected an improvement in growth for the upcoming fiscal year, but noted that sluggish investment and external demand could hinder a speedy recovery. It attributed the weakened growth outlook to unfavorable global and domestic factors.