Even though the Reserve Bank of India (RBI) is widely expected to keep key lending rates unchanged during its 4 August meeting, markets are keen to watch the tone of the central bank.
Unexpected rise in inflation rate in June and no clarity of monsoon rainfall are the key concerns for the central bank governor Raghuram Rajam to cut interest rates further.
The retail inflation in the country had hit an eight-month high of 5.4% in June on rising food prices. The RBI had expressed concerns over the rise in inflation last month.
Although the monsoon rainfall witnessed so far in the country is better than initially projected by the country's weather agency, there is a divergence in the regional distribution. The final outcome of monsoon rainfall is expected to be clear by September.
The RBI had cut repo rate by 25bps to 7.25% at its June meeting, its third cut so far this year.
Here is what foreign brokerages expect from RBI's meeting:
"Our baseline expectation is that the central bank will leave the key policy rates unchanged, though we expect the RBI's monetary policy stance to turn softer in August as we feel that the possibility of another 25bp repo rate cut later in H2 2015 is rising." –Barclays Capital.
"The RBI is expected to keep its policy rates unchanged as it frankly watches the weather. CPI inflation has crept a touch higher over recent months and stands at 5.4%. That's still under the 6% target but dry conditions on weak monsoon rains are causing potentially inflationary consequences for drought affected output from key crop producing regions." –Scotiabank.
"The unexpectedly-sharp pick-up in inflation in June, as well as the uncertainty caused by the monsoon, mean that the RBI is likely to keep the repo rate on hold at 7.25% at its policy meeting on Tuesday. But we don't think that this marks the end of the current easing cycle," –Capital Economics.
"We believe the RBI is likely to wait and watch how the monsoon season pans out and keep rates on hold in the August monetary policy meeting." --Morgan Stanley.