The Reserve Bank of India (RBI) is expected to hold interest rates at its monetary policy review on Tuesday and is more likely to cut rates by the end of the year when there is more clarity on the monsoons.
According to the Export-Import Bank of India, the rising trend in inflation seen over the last two months and the rainfall deficits are expected to weigh over the considerations of weak economic performance.
"Consequently, policy rate cut by the RBI in its third bi-monthly policy appears bleak. The RBI is likely to maintain status quo on rates in its bi-monthly policy meet on August 4," it said.
Consumer price-indexed (CPI), or retail, inflation rose to an eight-month high of 5.4 percent in June riding on costlier food, fuel, housing, clothing and footwear.
While the CPI-urban for June inched higher to 4.55 percent, the CPI-rural jumped to 6.07 percent from 5.52 percent in May.
At its last review in June, RBI cut the repo rate, at which it lends short-term to commercial banks, from 7.5 percent to 7.25, but left other parameters like the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged at 4 percent and 21.5 percent, respectively.
It was the third repo cut this year in June, while the central bank had indicated that there may not be any further cuts in the near term.
Giving the reasons for the June policy stance, RBI Governor Raghuram Rajan said plans for lower food output needed to be in place, global financial markets were volatile, factory output was recovering unevenly, services sector was emitting mixed signals, fuel inflation was up, exports were down and liquidity had improved.
According to India Ratings and Research, the RBI is likely to wait and watch on rates on Tuesday.
"Ind-Ra expects the policy stance to reflect RBI's continued intention to anchor both inflation and inflationary expectations. This has become even more important for RBI after its agreement with the government to follow a framework of inflation targeting," it said.
Meanwhile, American research firm Moody's Analytics, in a report this week, warned against the NDA government's moves to tamper with the autonomy of the Reserve Bank of India in deciding on interest rates as potentially damaging for the economy.
"We believe that a government-elected panel undermines the RBI's independence. Moving to the new model would severely dent the RBI's competency: Credibility would be lower, politics would drive decisions, and transparency would be reduced," the economic research company said.
The government last week released the draft Indian Financial Code, which proposes to remove the RBI governor's veto right in the monetary policy committee.
Besides taking away the RBI governor's authority to veto interest rate decisions, the draft also proposed that the monetary policy committee would have four representatives of the government and only three from the central bank, including the RBI "chairperson".
"Overall, we believe that tampering with the central bank's independence would make it difficult to anchor inflation expectations. This would weigh on India's economic prospects, particularly financial market stability," said the Moody's report.
"But given the criticism of the draft bill, it is unlikely to pass parliament," it added.
Terming the measure as a "dangerous road ahead", it said India's monetary policy, with Governor Raghuram Rajan at the helm, has been effective.
