Retail inflation in India touched the 5 per cent mark in June, compared to 4.87 per cent in May and has gone beyond the RBI's revised inflation projection of 4.8-4.9 per cent for the first half of the current fiscal.
The higher inflation last month comes in the backdrop of rising global crude oil prices which have been ruling at over $75 a barrel.
At the time of revising upwards its projection for the fiscal's first half during the June policy review, RBI Governor Urjit Patel noted that inflation had remained above the central bank's medium-term target of 4 per cent for more than six months.
The RBI, however, maintained its 'neutral' stance on policy, as it had done over four previous policy reviews when it held the repo, or its short term lending rate for commercial banks, at 6 per cent. This stance allows the RBI to move either way on rates.
In the current scenario, given also that industrial output growth fell in May at 3.2 per cent, as compared to rise of 4.9 per cent in April mainly on account of a decline in manufacturing, analysts are divided on the extent to which RBI will harden its stance on Wednesday.
"On the RBI policy, the markets are divided on policy rate hike in the next weeks meeting. The decision weightage given by MPC to core inflation is crucial and whether RBI changes its stance from neutral to hawkish," said Devendra Nevgi, Founder and Principal Partner, Delta Global Partners.
"RBI is likely to be data dependent and cautious on hikes," he added.
Complicating the situation for the RBI is the fact that interest rates in developed markets were rising after a prolonged period of very low rates. The US Federal Reserve increased its funds rate in June by 25 bps to a target range of 1.75-2 per cent.
The European Central Bank and the Bank of Japan are also in the process of hardening their monetary policy stance.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)