Raghuram Rajan to Shortly Announce Rate Decision Amid Row Over RBI Powers

Reserve Bank of India Governor Raghuram Rajan is expected to keep interest rates unchanged at the monetary policy review scheduled for 11 a.m. today, according to a majority of economists polled by Reuters. (Read: RBI Expected to Stand Pat, Words Weighed for Future Cuts)

The monetary policy announcement comes at a time when there is a raging debate about a draft parliamentary bill that seeks to reduce the central bank's independence to set interest rates. The draft legislation, published last month for public comments, called for the creation of a rate-setting panel, removed a reference to the central bank governor's veto power, and permitted the government to appoint more than half of its members. (Read: Government Not Trying to Curb RBI Powers: Finance Secretary)

Dr Rajan has cut the key repo rate thrice this year, but the benefits for the broader economy have been limited because of commercial banks' reluctance to lower their lending rates.

Chances of a rate cut today are low because retail inflation - the key parameter tracked by the RBI - edged up to an eight-month high in June. The other key factor likely to weigh against a rate cut is the uncertainty about monsoon rains, which irrigate nearly 60 per cent of the country's farmlands.

Economists also expect Dr Rajan to wait until the Federal Reserve's September meeting, when interest rates in the US are likely to go up for the first time in a decade. Any increase in interest rates in the US is expected to suck money out of emerging markets like India.

However, a few economists, including those from Moody's, expect Dr Rajan to surprise with a fourth rate cut this year.

"The Reserve Bank of India could deliver fireworks in its monetary policy meeting on Tuesday by cutting the repo rate by 25 basis points to 7 per cent," Moody's said in a report. (Also read: RBI Likely to Cut Rate by 0.25% on Tuesday: Moody's Analytics)

Repo rate is the rate at which the RBI lends short-term money to commercial banks.

Economists who expect a rate cut today have built their case on the continued slide in crude oil prices. Brent crude prices fell below $50/barrel for the first time in six months on Monday. The continue drop in crude oil prices augurs well for the Indian economy, which imports nearly 80 per cent of its oil needs.

The recent uptick in monsoon rains and the lack of demand in the Indian economy are some other arguments Dr Rajan is likely to consider while firming up his decision on rate cuts, economists say.

"We are expecting 0.25 per cent reduction and 0.5 per cent by the end of the year. If reduction has to be done, why not do it early? This will benefit industry and boost growth," said Naina Lal Kidwai, country head of HSBC India.

The BSE Sensex and the Nifty have gained momentum in the run up to the RBI's monetary policy, so a status quo may result in a temporary setback, analysts say.

Meanwhile, economists are likely to pour over Dr Rajan's commentary on the Indian economy for clues as to whether there is a chance of another interest rate cut this year.