In his budget, the finance minister announced the government would sign the Monetary Policy Framework Agreement with the RBI for controlling inflation, which will become a law providing for a monetary policy committee
The Reserve Bank of India (RBI) is widely expected to leave the repo rate, at which it lends to commercial banks, unchanged at 7.50 percent at its first bi-monthly monetary policy review of the new fiscal on Tuesday.
The scheduled review, coming after the first full budget presented by Finance Minister Arun Jaitley proposing changes in the RBI Act, follows two previous unscheduled rate cuts since January which brought the repo rate down from 8 percent by 50 basis points to the existing one. The interest rate cuts this year came after nearly two years.
The banks' cash reserve ratio (CRR) that determines their lending power, which has been at 4 percent since early 2013, is also expected to remain unchanged.
At the time of the last unscheduled cut, the RBI said that "given low capacity utilization and still-weak indicators of production and credit off-take, it is appropriate for RBI to be pre-emptive in its policy action to utilize the available space for monetary accommodation".
Announcing the rate cut in January, RBI Governor Raghuram Rajan said that "the key to further easing are data that confirm continuing disinflationary pressures and sustained high quality fiscal consolidation".
The consumer price index (CPI)-based inflation rose to 5.11 percent in January from 4.28 percent last December.
Moreover, Jaitley has extended the target deadline for controlling fiscal deficit to three percent, reasoning that insistence on a timetable to contain the deficit would harm growth prospects.
In his budget, the finance minister announced the government would sign the Monetary Policy Framework Agreement with the RBI for controlling inflation, which will become a law providing for a monetary policy committee.
The agreement is to "primarily maintain price stability while keeping in mind the objective of growth". It says the RBI will aim to bring retail inflation below six percent by January 2016 and to around four percent by fiscal 2016-17.
The government has also proposed to amend the RBI Act to take away money market regulatory powers from the central bank and bring it under the purview of market regulator the Securities and Exchange Board of India (SEBI).