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Direction: In the given question an inference is given in bold which is then followed by three paragraphs. You have to find the paragraph(s) from where it is inferred. Choose the option with the best possible outcome as your choice.

Inflation continues to move upward.

(I) With the central bank likely assuming limited spillover of excess liquidity on inflation, a monetary policy response via rate cuts is not warranted. A small reduction in real rates is unlikely to dissuade foreign investors who have been attracted by the economy's macroeconomic fundamentals. Real rates are either way going to narrow as inflation trends higher after bottoming out in June.

(II) The RBI is likely to stay focused on inflation, after lowering the repo rate by 25 basis points this month. The August CPI inflation has hardened to 3.36 per cent from July's 2.4 per cent on higher food price pressures and a pick-up in the housing component due to allowance hikes. At such levels, inflation is still below the 4 per cent target. However, the policy committee will retain its cautious outlook as CPI inflation is likely to continue rising through the fourth quarter on base effects and seasonal factors.

(III) This, along with the likelihood of modest recovery in Q2 growth numbers, put lingering expectations of an October rate cut to rest. Instead of a monetary policy response, the dilemma is likely to be dealt by a combination of forex market intervention, liquidity absorption measures and modest rupee gains, despite the associated costs.

Liquidity balance is also expected to narrow in the second half of the year as remonetisation progresses and government spending slows.

A)  Only (I)               

B)  Both (II) and (III)

C)  Only (III)             

D)  Both (I) and (II)

E)  Both (II) and (III)