RBIs main concern and rightly so is that even though inflation is currently within its target, inflationary expectations are rife. High global food, commodity global crude prices will keep maintaining an upward pressure on inflation in the coming months. The RBIs concerns are that the global risks to domestic inflation have only heightened.
To deal with the deluge of capital flows which only accentuates with rising arbitrage, the central bank has hinted at managing capital flows if the need arises. In view of the inflation concerns, RBI did not signal interest rate reduction but rather stability at the current elevated levels. By the time of the next Policy review, growth concerns could overtake inflation worries and we could see rates softening.
The author is director & principal economist, CRISIL