RBI expected to keep rates unchanged but strike dovish tone

Analysts feel central bank to wait for inflationary pressures to subside, US Fed action.  

The central bank policy review is expected to yield little in the way of action on Tuesday, but its statement will be pored over for clues as to whether there is a chance of another interest rate cut this year.

Despite a spike in food prices pushing consumer inflation to an eight-month high, some analysts believe the Reserve Bank of India would leave the door open for further easing, so that it can strengthen economy's so far patchy recovery if it can.

"We expect the RBI to keep the repo rate unchanged, but sound dovish from last time," said Rahul Bajoria, a regional economist at Barclays in Singapore.

The RBI has reduced its policy rate by three-quarters of a percentage point since embarking on an easing cycle in January.

The last cut lowered the repo rate to 7.25per cent on June 2.

But, to the central bank's chagrin, the benefits for the broader economy have been limited because of commercial banks' reluctance to lower their lending rates.

For now, analysts expect a pause in policy moves, as the RBI will want to wait for inflationary pressures to subside and for more clarity on when US interest rates will rise.

The RBI's next policy review is set for Sept. 29.

That would be after the Fed's September meeting, and any increase in US rates is expected to suck money out of emerging markets.

"RBI will also wait to see if the Fed raises rates in September as that will potentially impact the volatility in the foreign exchange market," Bajoria said.

All but four of 51 analysts predicted the RBI would keep the repo rate on hold on Tuesday, but views were split over future action.

Twenty-four analysts predicted another 25 basis points cut this year, while 23 saw no change.

Higher food prices pushed India's annualised consumer inflation up to 5.4per cent in June, and analysts say the outlook will depend on rains as the monsoon season enters its climax over the next two months.

At its last policy review in June, the RBI had projected rising food prices could send consumer inflation to the top end of its 2 to 6per cent target range by January.

Any threat to its target would keep the RBI from cutting rates. Indebted Indian companies, especially the mid-sized and smaller ones, argue that the central bank should take comfort in the fall in wholesale price inflation for an unprecedented eight months and cut interest rates further.

The RBI, however, is unhappy that commercial banks have delayed reducing lending rates.

The banks say the RBI has kept cash conditions too tight to lower rates, but the central bank does not accept that argument.