The Reserve Bank of India (RBI) is likely to keep interest rate unchanged in the upcoming annual monetary policy on April 1 as the retail inflation is yet to show definite signs of moderation.
Although inflation has eased both in terms of consumer price index and food, the RBI would look at other factors including the exchange rate, HSBC country head Naina Lal Kidwai said.
"It would be quite a tough call for the RBI in the given scenario...I expect the RBI to maintain status quo," she said.
In its third quarter review of monetary policy, the Reserve Bank of India (RBI) in January raised the key repo rate by 0.25 per cent to 8 per cent in a bid to curb inflation.
Besides, outlook on inflation, the central bank would also take into account the strengthening rupee and its impact on exports, she added.
Strengthening of rupee against dollar in the past few days following inflow of foreign currency has put pressure on exports. In addition, unseasonal rains during this month may result in stoking food inflation in the near term.
The RBI is scheduled to announce its annual monetary policy for 2014-15 on April 1.
"In my view RBI may go for a pause this time," Federal Bank managing director Shyam Srinivasan said.
According to Punjab National Bank chairman and managing director K R Kamath the RBI action will depend on outlook on inflation.
The annual rate of inflation, based on the monthly wholesale price index, stood at 4.68 per cent in February. Retail inflation was at a 25-month low of 8.1 per cent in the month.
Morgan Stanley said volatility in food prices and a base effect will result in the CPI inflation, to go up to 8.5 per cent in the near-term and cool off to 6.5 per cent by December.
"We see risks emerging to the food inflation outlook due to the recent weather-related concerns prompted by unseasonal rain and hailstorms in some parts of the country," it said.
Raghuram Rajan, who took charge as Governor of the apex bank last September, raised the rates at his first policy announcement, rightly foreseeing a pressure on the inflation front. He increased it again for a third time since he took charge in January when the market was expecting a pause.
It can be noted that even though the RBI has not formally adopted inflation targeting, it has gone public on targeting consumer price inflation down to 8 per cent by January 2015 and further down to 6 per cent by January 2016, as per the recommendations of the Patel committee.