The Reserve Bank of India (RBI) has left the repo rate unchanged at 6.50 percent; the cash reserve ratio has also been retained at 4 percent.
In the third bi-monthly monetary policy statement released on Tuesday (August 9), RBI governor said that the inflation scenario is quite uncertain, given the divergent trends.
"The prospects for inflation excluding food and fuel are more uncertain; if the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation.
"In addition, the full implementation of the recommendations of the 7th central pay commission (CPC) on allowances will affect the magnitude of the direct effect of house rents on the CPI. On balance, inflation projections as given in the June bi-monthly statement, i.e. of a central trajectory towards 5 per cent by March 2017 with risks tilted to the upside, are retained," he said.
Outgoing Reserve Bank of India (RBI) governor Raghuram Rajan will present his final bi-monthly policy review as head of the central bank in a few hours. It is believed that Rajan may refrain from cutting interest rates at his final policy review.
The next policy statement is due on Oct. 4.
The BSE Sensex was trading almost flat ahead of the meet, with the 30-scrip benchmark index opening with minor gains but slipping in the red shortly thereafter. It was hovering around 28,180, just 5 points higher from its previous close, at around 9.50 a.m.
Today's policy review assumes significance since it will be the last policy review presented by Rajan, since his tenure ends on Sept. 4, following which he plans to return to academia in the United States.
Analysts expect the RBI governor to leave interest rates unchanged in his final policy review on Tuesday.
"We expect RBI to maintain a status quo on policy rates in the monetary policy review on Aug. 09, 2016. Headline inflation has stayed elevated over the past 3 months and, in fact, is anticipated to remain so for the next couple of months on vegetables and pulses," Kapil Gupta and Prateek Parekh, analysts at Edelweiss Securities Limited, had said in a note on July 29.
The former chief economist at the International Monetary Fund has cut rates by 150 basis points since January 2015.
The Indian government is yet to announce a successor to replace Rajan.
In June, Rajan had announced his decision to return to teaching, thereby ruling out the possibility of continuing as the RBI governor for a second term.
Since Rajan made the announcement, speculations have been a rife with several names doing the rounds on who would replace Rajan. Of all the contenders, it is believed that Rakesh Mohan, an executive director at the IMF, or Subir Gokarn, a former deputy governor of RBI, would make an ideal successor to Rajan. However, some other names that have cropped up as candidates for the post include NITI Aayog Vice President Arvind Panagariya and SBI Chairman Arundhati Bhattacharya.
The RBI governor's views on the inflation trajectory in the wake of rising food prices and the union government's announcement of salary hike for central government employees in accordance with the 7th Central Pay Commission's proposals, the impact of the Goods and Services Tax (GST) Bill and global macroeconomic trends will be keenly watched on Tuesday.
The bi-monthly policy statement by the RBI could be a big trigger for stock markets as well.
Story updated at 11.07 a.m. with additional details.