The latest industrial output reading may have been well below forecasts, but Wednesday's inflation data could well be the deciding factor on whether the RBI chooses to pause, or continue with its monetary tightening.

The broad consensus among analysts is that the WPI-based inflation estimate for the month of August could be a tad below 10 per cent. This could force the RBI to persist with its anti-inflationary stance in the upcoming mid-quarter review on Friday, despite clear signs of flagging growth.

With core inflation (for non-food manufactured products) remaining well above the central bank's comfort zone, analysts expect a 25 basis points hike in the repo rate could be on the cards.

The WPI, the main inflation gauge, had risen 9.22 per cent in July. The RBI has repeatedly maintained that its biggest challenge is managing the growth-inflation dynamics in the post-crisis period. Spurring economic growth requires maintaining a low interest rate regime, while inflation management warrants hiking of interest rates.

Industrial output rose 3.3 per cent in July, sharply lower than June's 8.8 per cent and a robust 9.9 per cent in July last year, pulled down by a dip in capital goods production. In reaction to the industrial output data, ICRA had said on Monday that with inflation expected to have accelerated in August, it continues to anticipate monetary tightening.

However, analysts widely expect inflation to ease in the subsequent months, which suggests that policy rates may be close to a peak.

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