This week's monetary policy announcement by the Reserve Bank of India (RBI) was as usual a much awaited one. The Finance Minister kept dropping his not-so-subtle hints on the need for a rate cut. But eventually, the RBI cut the CRR rate and left the key policy rates unchanged. It also revised expected GDP growth downwards and expected inflation rate upwards.

Now everyone is waiting patiently for the next meeting which is scheduled for the next quarter. The RBI governor has stated that he would review rate cuts at that time. So now the question is would he go ahead with a rate cut or not? There are two forces in play here. One the country's economic growth has slowed down. And higher interest rates would continue to play spoil sport. So there is tremendous pressure on this front to ease the interest rates. But the second side of the story is on the inflation front. Inflation rates have come down from the double digit numbers but continue to remain high. In fact, RBI's upward revision indicates that they would not ease anytime soon. Therefore reducing interest rates may lead the monster of inflation to rear its ugly head again.

The thing here is that the RBI would prefer to watch the government's commitment to policy reforms. If reforms go ahead as planned then inflation would come down. This in turn may prompt RBI to cut down the rate. But if the government falls back to its past avatar and starts dilly dallying again, then the RBI would be forced to maintain its hawkish stance.