Though the Reserve Bank of India is expected to cut interest rates next week by a quarter percent to a four-year low, officials say concerns over prices make it likely to resist political pressure for significant easing in the coming months.
In growing contrast with the government, which is desperate to accelerate a sluggish recovery, an increasingly independent RBI under governor Raghuram Rajan remains focused on a long-term inflation target of 4 percent and ending decades of damaging price volatility.
"The inflation outlook is still uncertain, and that is why the governor wants to be cautious," said one official familiar with the RBI's thinking. "It makes sense to wait and watch how sustainable the fall in inflation will be."
Headline inflation has dipped due to lower commodity prices, but the officials said the RBI was concerned that any spike in food prices due to weak monsoon rains or in crude oil would push up prices and expectations of future rises - at least until India can resolve significant supply and transport bottlenecks.
Worries about the impact from rate hikes expected in the United States later this year add to the caution, the officials said, given the potential for destabilising outflows by foreign investors and volatility in the rupee.
For Rajan, who said last week he intended to control inflation "not just today, but well into the future", it is also about learning the lessons of a boom-and-bust past.
Rajan's predecessor, Duvvuri Subbarao, cut interest rates in response to the global financial crisis to 4.75 percent by April 2009, from 9 percent in July 2008. That cut fuelled double-digit inflation and eventually forced the RBI into reverse, raising rates back to 8.50 percent by October 2011.
Rajan, who took over two years later, was still fighting inflation at near double digits when he joined in 2013.
"I think Governor Rajan is deliberately falling behind the curve," said A. Prasanna, an economist at ICICI Securities Primary Dealership. "Rajan wants inflation to be low and stable for a sustainable period," he added. "You can be a proactive central bank only after anchoring inflation expectations."
Avoiding over-reactions is key for the RBI, the officials said, despite the growing clamour for more rate cuts from business and government after consumer price inflation hit a record low of 3.66 percent in August.
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Rajan last week noted that without a favourable base effect, consumer prices would have risen at an annualised pace of around "mid five" percent.
India's inflation has long been difficult to predict, given it is heavily influenced by volatile food and crude prices. To combat that, Rajan formally adopted inflation targeting earlier this year, in the biggest monetary policy overhaul in decades.
But his caution is frustrating Delhi and corporate India, which say the 7.25 percent rate at which the RBI lends to commercial banks is too high for a recovering economy.
Taking into account consumer inflation, India's real interest rates were 3.59 percent in August, the second highest month on record after the 3.79 percent in November 2014, according to Thomson Reuters calculations.
At the wholesale price inflation level, real interest rates are even higher, hitting a record 12.2 percent in August.
High effective interest rates drag on GDP growth, which is seen at the lower end of a government target of 8.1 percent to 8.5 percent for the current financial year.
The Indian government's chief economic adviser, Arvind Subramanian, told Reuters on Wednesday the economy would hit that target, even if a tougher global environment will weigh.
Extra public spending, he said, would not be needed.
"Monetary policy will ease in line with ... inflation," he added. "We have had three cuts, the year is not over, so that still holds."