The central bank’s balancing act has become more delicate. After 13 rate hikes since March 2010, the markets and corporate India expect some sort of reversal in the monetary policy and are clamouring for rate cuts.

There are a couple of dangers lurking out there. For one, in keeping with the government’s recent track record on statistical releases, September’s inflation rate was revised upwards to 10% from 9.7%.

Secondly, the Wholesale Price Index (WPI) was mainly pulled down by the slower rate of price increase in the food and primary articles category. That is on expected lines because last year, around the same time, there was a huge increase in food prices due to heavy rains. The base effect has started to kick in now.

As it is, the central bank doesn’t care much for headline numbers and prefers to base its decision on core or non-food manufacturing inflation. As the chart alongside shows, this measure of inflation has increased to 7.9% in November from 7.6% the previous month, according to Elara Securities India Pvt. Ltd. Citigroup economists’ estimates are even harsher. Their calculation puts core inflation at 8%, the highest since March.

The rise in core inflation “reflects tight capacity in the economy due to cyclical as well as structural determinants of demand-supply imbalances. Moreover, the lagged pass-through of cost-push pressures is also still haunting the core inflation reading," wrote Leif Lybecker Eskesen, chief economist for India and Association of Southeast Asian Nations at the Hongkong and Shanghai Banking Corp. Ltd.

Of course, the sharp depreciation in the rupee also has contributed its bit to the rising core inflation. There was a sharp increase in the basic metals, alloys and metal products category, which came despite a decline in the international commodity prices.

Moreover, inflationary expectations show no signs of abating. The Reserve Bank of India’s latest inflationary expectations survey done in September “indicate(s) that households expect inflation to rise further by 50 and 120 basis points during the next three months and next one year, respectively, from the perceived current rate of 11.7%". One basis point is one-hundredth of a percentage point.

Slowing growth and the base effect will mean that WPI will come down. But the question is, by how much?

In the short term at least, factors such as the rupee’s depreciation and core inflation will dampen any ardour the central bank has to support growth by cutting rates in the next monetary policy review, especially at a time when it is fighting a lone battle to tame rising prices.

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