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 the expected decision to maintain interest rates. The RBI also hinted that there may not be a cut in the cash reserve ratio (CRR), disappointing market expectations. In December, the RBI decided to keep interest rates unchanged after a series of hikes between March 2010 and October 2011. The RBI emphasized that future rate decisions will be influenced by core inflation and exchange rate impacts in its quarterly review on Monday. Core inflation, which tracks price changes in non-food manufactured goods, has remained at or above 7 percent for 11 consecutive months, well above its usual rate of around 4 percent. In 2011, the rupee depreciated by 16 percent against the dollar, leading to higher costs for essential imports like oil and contributing to inflation. Despite a decrease in food inflation, overall annual inflation, as indicated by the wholesale price index, dropped to a two-year low of 7.47 percent in December. However, inflation in manufactured products increased from the previous month. The RBI warned of potential inflation risks from factors such as inadequate supply responses, exchange rate fluctuations, suppressed inflation, and government spending policies. The central bank anticipated that inflation would fall to the target of 7 percent by the end of the fiscal year in March. Delays in decision-making in New Delhi have hindered investment in industrial capacity, which could alleviate supply constraints in India, while initiatives to boost the purchasing power of rural consumers have driven up demand for high-protein foods. Have hopes of a CRR cut been disappointed? The yields on Indian government bonds and overnight indexed swap rates decreased on Monday, leading up to the release of the RBI's report, as there was a growing belief that the central bank might reduce the CRR. Out of 20 economists surveyed by Reuters last week, 7 anticipated a CRR reduction on Tuesday. However, none of the 22 economists expected 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 decreased by 3 bps to 7.23 percent. However, some analysts believe that the central bank's review on Monday may have reduced the chances of a CRR cut on Tuesday. The RBI recognized the significant tightening of liquidity since November but mentioned that liquidity stress had been managed through OMOs. This indicates that the RBI may prefer to continue injecting rupee liquidity through OMOs rather than immediately reducing the CRR, as there are inflation risks. A senior trader at a foreign bank mentioned that Monday's statement seemed to rule out a CRR cut, which could negatively impact bonds on Tuesday. Despite this, some believe that a CRR cut on Tuesday is still a possibility. The central bank stated that it typically uses open market operations to manage tight market liquidity, but it is open to considering other measures if necessary. Ensuring that liquidity deficits are kept within acceptable limits to support the smooth operation of other markets is a key policy goal. The RBI expressed optimism for improved growth in the upcoming fiscal year starting in April, but cautioned that slow recovery may persist due to weak investment and external demand. It attributed the weakened growth outlook to adverse global and domestic factors.