The Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, started its 2-day meeting today amid presumptions that the central bank will continue with pause on key interest rate in view of firming inflation.
The outcome of the 6-member MPC meeting is being keenly awaited by stakeholders amidst a huge sell-off in the stock markets globally.
In its December review, the MPC had kept the benchmark interest rate unchanged on concerns of a possible price rise but had left the door ajar for a rate cut in future.
Retail inflation crossed the RBI's comfort level and rose to 5.21 per cent in December on increase in prices of food items.
The retail inflation, based on Consumer Price Index CPI), was 4.88 per cent in November. In December 2015, it was 3.41 per cent.
The Reserve Bank of India had reduced the benchmark lending rate by 0.25 percentage points to 6 per cent in August, bringing it to a 6-year low.
Bankers and experts are of the view that for the third time in a row, RBI may key repo-rate or short term lending rate unchanged as inflation trajectory is likely to remain upward at a time when crude oil prices in international market has started firming up and government plans to raise crop support price.
Also, pick up in economic activity in the second half of the current financial year, ending March 31, will reduce pressure on RBI to go in for a rate cut to boost growth.
Experts said that while the main concern for the central bank will be the rising inflation trajectory, the MPC will also factor in the Union Budget 2018-19 presented by Finance Minister Arun Jaitley to Parliament earlier this month.
RBI has been asked by the government to target inflation at 4 per cent, plus or minus 2 per cent, and its rise beyond the comfort zone will put pressure on the central bank not cut interest rate (repo rate).
After the government presented the pre-budget Economic Survey to Parliament, Chief Economic Adviser Arvind Subramanian too had indicated that the scope for RBI to lower interest rate may be limited with growth picking up and inflation hardening.