Singh, 78, wants to curb inflation ahead of elections in nine states over the next 18 months including in the northern province of Uttar Pradesh, which sends a seventh of all lawmakers to the national parliament.

Finance Minister Pranab Mukherjee on Dec. 30 raised his inflation forecast for the current fiscal year through March after food prices gained. The inflation rate may be "around"
6.5 percent by March 31, Mukherjee said, more than the 6 percent prediction he made on Dec. 14. The rate was 7.5 percent in November.

Food inflation climbed to 18.32 percent in the week ended Dec. 25 from a year earlier, the highest since July, according to a commerce ministry statement in New Delhi on Jan. 6. Onion prices soared 80 percent during the week.

Singh's government is concerned high food costs for a sustained period will lead to more wage demands, stoking inflation.

"If food-price inflation persists for a long time, it also feeds into the rest of the sectors in the economy," Rangarajan said. "Therefore, we really need to watch the behavior of food prices."

Eoin Treacy's view In a democracy where those entitled to vote are also those most affected by food price inflation; higher prices quickly become a political liability. Therefore politicians, with an eye on the next election, have a vested interest in following whatever policies deemed necessary to counter inflationary pressures on basic food stuffs.

The RBI Repo rate, currently at 6.25%, is still comparatively low by historical standards but the trajectory of rate hikes has so far been quite steep; rising 150 basis points in 2010. With inflationary pressures stubbornly high, there is every reason to expect further interest rate hikes.

The US Dollar remains in a medium-term downtrend against the Rupee. The decline has been characterised by a progression of lower rally highs and a sustained move above R46 would be required to question potential for additional Rupee strength.

The Bombay Banks Index was an upside leader from at least March 2009 and broke upwards to new all time highs in August. It had become overextended relative to the 200-day MA by early November and has since reverted to that trend mean. It is now testing both the MA and the 2008 peak. The Index needs to hold above, or in the region of, the psychological 12.000 level if the medium-term uptrend is to remain consistent. So far, the pullback is consistent with a retest of the previous high but it does need to find support relatively soon, if it is not to offer an increased headwind to the wider market.

The Nifty Index also performed impressively in 2010 and retested the pre-crisis 2008 peak by early November. It continues to range below 6350 and needs to hold above or in the region of the 200-day MA, currently near 5600, to sustain the medium-term bullish outlook. The current challenges facing the Indian market do not appear to pose a significant risk to its long-term potential however, considering the fact that the Index is currently in the region of the previous high, it would not be too surprising if it spends some additional time in this area.