Reserve Bank of India
Reserve Bank of IndiaREUTERS/Rupak De Chowdhuri

The Reserve Bank of India (RBI) is widely expected to keep interest rates on hold on Tuesday as Governor Raghuram Rajan pursues his quest to conquer inflation, encouraged by signs that upward pressures on consumer prices have begun to wane.

Investors in India's bonds are happy with the priority Rajan gave to breaking the "back of inflation" in a speech last week. While investors in the booming stock market have been so filled with hope by the election of Prime Minister Narendra Modi last May, that they are undeterred by the high interest rates.

Crucially, the government has backed Rajan, though his strategy is far less popular with businesses, which want relief from high interest rates, and banks, which want to lend more.

India needs far stronger investment if it is to decisively recover from the sub-5% growth suffered in the past two years, and grow fast enough to provide jobs for the millions of young people entering the labour market.

All the RBI has offered so far this year has been modest measures to make more credit available, and analysts expect Tuesday's policy review to offer more of the same, with no cut in interest rates seen until well into next year.

And, the RBI is expected to strike a careful, neutral tone in its policy statement, having confused markets earlier by swinging between dovishness and hawkishness.

Analysts will scour a separate RBI report on inflation for details of how the central bank sees price trends evolving as it strives to bring consumer price inflation down to 8 percent by January 2015 and to 6% a year later.

Consumer price inflation slowed to 7.8% in August, and core inflation, which strips out food and fuel prices, eased to 6.9%.

All but three of 46 economists said the RBI would leave its key repo rate unchanged at 8.0% after last raising it by 25 basis points in January.

"Even with relative comfort on inflation, we don't expect RBI to cut rates immediately as it has already stated its target for a 6 percent inflation by January 2016," Indranil Pan, chief economist at Kotak Mahindra Bank. "We expect a neutral tone in the policy."

The poll also showed the RBI is unlikely to alter the statutory liquidity ratio - or the minimum bond holding requirements that lenders must set aside - after cutting it by half a percentage point at each of its previous two reviews.

But some economists say the central bank could cut the ceiling on bonds that must be held-to-maturity.

The RBI is not expected to cut interest rates until the April-June quarter, according to the Reuters poll.

Ultimately, Modi's reformist government will need more priority to be given to boosting economic growth, but it will have to play its part by remedying structual issues that create supply bottlenecks, and by reducing its fiscal deficit.

Standard & Poor's cited government measures that would allow the RBI to carry out an "effective" monetary policy as a factor behind its upgrade in India's outlook to "stable" on Friday.