economic recovery. It is a difficult situation for the central bank."
Economic growth has averaged 4.6 percent between the fourth quarter of 2012 and the second quarter of 2013. Headline inflation, measured by wholesale prices, averaged around 7 percent in the same period -- way above the central bank's perceived comfort level of 5 percent.
Worries over high inflation led new RBI chief Raghuram Rajan to surprise markets in his policy review last month with an interest rate hike. Economists are now split over whether Rajan will hike rates again at the next review on Oct. 29.
If inflation data does come in line with expectations, the odds for another hike at the October review will only increase.
Even though India is stumbling through its worst economic crisis since 1991, Rajan has clearly signaled he would focus on price stability, which he sees as a necessary condition for lifting economic growth from a decade low.
Inflation is expected to come down in coming months as a slowing economy is likely to keep demand-driven price pressures in check and as this summer's strong monsoon rains may eventually cool food prices.
Yet, price risks persist. Adjustments in domestic prices of subsidised fuel and other imported items following a sharp depreciation of the rupee are still incomplete.
Although the rupee gained 5 percent last month, it is still down around 10 percent this year against the dollar, meaning higher import costs for items such as oil, fertilizer, pulses and edible oil in rupee terms.
The rupee hit record lows in late August, pressured by the country's gaping current account deficit and a general exodus of global investors from emerging market assets.
RECOVERY IN SIGHT?
In its bid to revive the economy ahead of polls, Singh's government has decided to inject capital into banks so they can offer cheaper loans for purchases of items such as bikes, fridges, washing machines and televisions.
The move is aimed at boosting production in the consumer durables sector, which has failed to register growth since last November.
A pick-up in merchandise exports, aided by a recovery in global economy along with the rupee depreciation, has bolstered the government's hopes