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The Reserve Bank of India is expected to keep its policy interest rate unchanged on Tuesday after retail inflation, which has become its preferred price gauge, eased to a 25-month low in February.
With India heading for elections running from April 7 to May 12, RBI Governor Raghuram Rajan may also want to wait for a glimpse of the next government's economic policies as well as the outlook for monsoon season rains that begin in June before making a policy move, economists said.
All 53 analysts in a Reuters poll released on Thursday expect the repo rate to stay at 8%.
"We expect RBI to stay on hold at this policy given the breathing space they enjoy at the moment with the recent softening in inflation," said Siddhartha Sanyal, India economist at Barclays.
"There are two known unknowns - elections and the monsoon - and by June, Rajan will have better clarity on both."
While a stable government could mean better fiscal management and accelerated economic reforms, an unstable and fragmented coalition could trigger inflationary populist spending that may prompt the RBI to raise rates. Whichever party forms the government will need to do so with coalition partners.
India's consumer price index inflation eased to 8.10% in February, near the RBI's January 2015 target of 8%, while wholesale price index slowed to a 9-month low of 4.68%.
However, core CPI has remained stubbornly elevated at around 8%, reflecting demand-side pressures despite an economy growing at its slowest in a decade.
"We believe core inflation will remain sticky around current levels in the near term and only decline slightly during the year. Monetary policy is currently in neutral gear but eventually needs to venture into contractionary territory," HSBC economist Leif Eskesen said in a report on Friday.
Rajan has raised the policy repo rate three times since he took over in September, including a surprise hike in January, but has recently toned down his anti-inflation rhetoric, saying the RBI has not yet adopted an internal panel report that proposes inflation targeting.
The panel recommended that the central bank formally target inflation, shedding its long-time multiple-goal approach of price stability, financial stability and economic growth.
However, Rajan has implemented some of the panel's proposals, including shifting to CPI from WPI as India's main price barometer and targeting a glide-path for CPI inflation to bring it down to 4% eventually, making it unlikely that he would sound dovish despite softening price pressures.
"Do not expect the central bank to relax its tight monetary policy stance anytime soon," economist Radhika Rao at DBS said in a note on Friday.
"The RBI would want to wait for the next government to map out its fiscal and economic priorities, and ensure that macroeconomic imbalances do not return to imperil the rupee, and stymie its ability to control inflation."
