Of late, India’s macro math had been angst-inducing because of widening trade deficit, ascending inflation, tardy industrial activity and a weak rupee.

Add rising household inflationary expectations (captured by the Reserve Bank of India’s (RBI’s) quarterly surveys) to that mix, and the situation tilts towards a cautionary rate hike.

Clearly, the Monetary Policy Committee (MPC) of RBI thought as much. But it continues to keep the stance neutral, which affords it the latitude to swing either way as clarity emerges on macro trends inside and outside India.

Importantly, the MPC on Wednesday mentioned that the output gap has “virtually closed". That’s a step up in nuance from the June monetary policy review, when it had said “almost closed".

Put another way, it sees heightened risk of extant price pressures—emanating from crude oil, metals and food prices, and weakening exchange rate—morphing into generalized inflation with demand improving.

In the past few years, low food inflation had helped tame headline consumer inflation. That script could change this year and food inflation could edge up on a low base if the higher minimum support prices (MSP) for crops announced by the government is implemented well.

And over the past few months, consumer prices have been under pressure from both domestic and global factors, including rising prices of crude oil and commodities, and a depreciating rupee. The good part is that Brent crude has come off its highs and is hovering below the levels seen during the June monetary policy review.

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But despite this modicum of correction and semblance of stability, fuel inflation surged 160 basis points from May to 8.5% in June, driven by a weakening rupee and the 60% on-year rise in Brent crude prices.

The worrying part now is that domestic pressure on inflation is coming from the demand side and is manifesting in higher core inflation, which printed at over 6% in June.

Short-term data also show healthy demand is leading to improvement in capacity utilization in some sectors such as two-wheelers, tractors, cars, cement and steel.

RBI’s order books, inventories and capacity utilization, or OBICUS, survey results published last April confirm improvement in capacity utilization and Crisil’s own findings corroborate this. But not every development is negative from an inflation point of view, for two reasons.

First, at an all-India level, the 10% cumulative deficiency in rains seen in the first few days of the south-west monsoon has reduced to 6% on 31 July. But uneven distribution does raise some concern.

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Second, the introduction of the goods and services tax (GST), which pushed up taxes on services, had led to one-time rise in services inflation. That impact would wear off now.

Additionally, the recent reduction in GST rates on many items should shave off some inflation. But global experience tells us that the pass-through of changes in tax rates is often asymmetric: Producers quickly pass on tax increases to consumers, but tend to hold on to gains from tax cuts.

Globally, differences in monetary policy stance of the US and the UK, compared with Europe and Japan (largely due to different growth and inflation outcomes), spawns macro incongruence.

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Additionally, there are also risks of policy error. For example, a faster-than-expected rise in US inflation could spur a reflexive tightening by the US Fed, which in turn would roil emerging markets. Besides, trade wars are intensifying and setting off complex ripple-effects.

All this will have implications on growth, investments and capital flows. Consequently, monetary policy decisions are becoming as fiendishly complicated as a battle of 64 squares. There are just too many moving parts.

Prudence demands abundant caution in such times, and at Mint Road, it became the force that moved the hand.

Dharmakirti Joshi is chief economist at Crisil.

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