The Indian government has grudgingly accepted the central bank will likely lift interest rates on Tuesday, but is not convinced conditions warrant further tightening thereafter, official sources told Reuters.
While the Reserve Bank of India remains worried that inflation is being driven by demand-side factors that will require further action in coming months, New Delhi argues that a good summer monsoon will ease high food prices, and that slow growth in money supply undermines the case for further rate increases.
RBI Governor Duvvuri Subbarao and Finance Minister Pranab Mukherjee were set to hold their usual Friday meeting ahead of the July 27 quarterly monetary policy review, at which the RBI is widely expected to lift rates by 25 basis points each and reiterate its stance of a "calibrated" exit from loose policy.
At issue is the source of inflation, which has been above 10 percent for the past five months. Initially driven by high food prices - which are beyond the scope of monetary policy - inflation has become more generalised.
The central bank, which has lifted rates three times since March by 25 basis points each, also prefers to take "baby steps" to protect economic growth momentum and does not want to deviate from its stated path of a gradual exit, which could unsettle markets. That said, it has been known for its penchant for surprise.
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