The table shows how the broad economic indicators have moved in the last three months. It is very obvious that after a sharp jump in August last year, manufacturing inflation has by and large been benign.

In fact, in the last four-and-a-half months, the manufacturing inflation component of the WPI index has not moved at all. The fuel component has grown in the last three months on account of higher crude prices, but that has been more than taken care of by a sharp fall in prices of primary articles.

Crude prices are clearly off their highs and sooner or later they might have to be revised downwards even domestically.

Primary article prices might start to climb a bit from here, but the base effect will ensure that the headline year-on-year inflation does not go significantly go above 5.50 per cent by March-end.

In fact, even if inflation grows at 5.50 per cent from now on, the base effect will bring down the year-on-year rate below 4 per cent by June.

All said and done, the RBI's primary concern should be manufacturing inflation, which has been close to zero in the last five months.

The growth in industrial production at 30 per cent annualised for Oct-Dec 2004-05 looks too high, but that is because it's not a de-seasonalised number.

If you compare it to the industrial production growth in the last two years in the same period for a like-to-like comparison, it only finishes a poor third.

One can say with some confidence that there may have been a healthy growth in industrial production in the third quarter this year, but clearly it is not exceptional.

Credit growth in the last three months has been higher this year as compared to the last two years, but it is not too out of line.

There is no doubt that we are in the midst of a capex cycle and hence credit growth will continue to be healthy for at least some more time.

Apart from the level of economic activity, there are two other factors worth considering before trying to figure out what the central bank might do in its forthcoming policy.

One is our currency and the other is Fed's monetary action by then. Fed would have mostly moved to 2.75 per cent by then and may be looking at a few more hikes, which cannot be positive for RBI's monetary stance.

But hopefully, the continued strength in the rupee will by and large counter this negative.

There is no doubt that India will continue to see large capital inflows.

The $6.40-billion current account deficit for the second quarter must have been on account of some bunched-up one-off defence purchases.

There is a large divergence between the import data of the RBI and that of the DGCI&S for that quarter which is normally not the case.

At worst, we might end up with a marginal current account deficit going ahead. Coupled with the large capital flow expectation, the rupee should continue to be strong in the absence of heavy RBI intervention.

So, in the current environment of benign manufacturing inflation, healthy but not exceptional industrial growth and credit pick-up and a strong rupee; I do not expect the RBI to hike rates in its April policy.

Knowing how conservative the central banks are, it may however continue with its monetary stance.

Inflation is benign now, but there is a small possibility that it might start moving up again if the level of economic activity continues to be high for a longer period of time.

Looks like the central bank will go for the third outcome - leave both rates and its monetary stance unchanged.

(The author is senior trader, Interest Rates at HSBC Mumbai. The views expressed herein are his own and not necessarily those of his employer.)

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