It seems the Reserve Bank of India (RBI) is winning on inflation. And, in all probability, it will opt for status quo on interest rates.

Sometime towards the end of this month, RBI has to take a call on interest rates. Will governor Y.V. Reddy hold back from hiking interest rates yet again?

The inflation demon looks to have been tamed. It is now hovering around 4 per cent. According to Montek Singh Ahluwalia, deputy chairman of the Planning Commission, the rate of inflation has been steadily coming down in each of the past five weeks. “We have entered the comfort zone as far as inflation is concerned.”

A look at the measures taken by RBI over the past few months, as well as their impact on the economy, shows that the central bank has been able to balance the almost conflicting objectives of keeping up the economy’s growth momentum, while keeping inflationary pressures at bay. While the hike in cash reserve ratio (CRR), hike in repo rates and reduction in interest paid on CRR balances were seen as excessive and not showing immediate results, the current numbers show that with a small lag, these measures have had the desired effect.

At the time of RBI’s annual monetary review, Reddy said, “the document is longish in themes, which means it is short on measures!” But as Jammu & Kashmir Bank Chairman and CEO Haseeb Drabu points out, “Excess liquidity in the system has been resulting in easy credit and lower interest rates.” He says this had generated demand, fuelled speculation, and caused overheating and inflation. “Reddy’s prescription had been to reduce liquidity to keep at less than ‘ample’ levels,” says Drabu.