The Reserve Bank of India (RBI) said the growth outlook and business climate have weakened but warned of upward risks to inflation, a day before it is widely expected to keep interest rates on hold. The RBI also gave little indication that it might cut the cash reserve ratio (CRR), the share of deposits banks must maintain with the central bank, potentially disappointing growing market hopes it would do so. The RBI left interest rates unchanged in December after raising them 13 times between March 2010 and October 2011. “The critical factors in rate actions ahead will be core inflation and exchange rate pass-through,” the RBI said on Monday in its quarterly macroeconomic and monetary review. Core inflation, which measures price changes in non-food manufactured products, has been at or above 7 percent for 11 straight months, compared to its long-term trend of about 4 percent, the RBI said. Adding to inflationary pressures, the rupee fell 16 percent against the dollar in 2011, boosting the cost of critical imports such as oil. Annual headline inflation, as measured by the wholesale price index, slowed to a two-year low of 7.47 percent in December, thanks to a sharp decline in food inflation. However, manufactured product inflation edged up from the previous month. “Upside risks to inflation persist from insufficient supply responses, exchange rate pass-through, suppressed inflation and an expansionary fiscal stance,” the RBI said, adding that inflation was likely to ease to its target of 7 percent by the end of the fiscal year in March.
