Reserve Bank of India (RBI) officials meet next week to decide on the possibility of further interest rate cuts. The Reserve Bank of India has already cut interest rate several times in the last couple of years, taking the cuts to a total of 125 basis points, since the easing cycle began.
One of the big reasons for that is there are two mega events that would come after the Reserve Bank of India policy.
Britain would hold a referendum on whether the country remains a member of the EU. While most polls have forecasted a virtually dead heat, if the decision is to move out, it could spell worries for financial markets.
Raghuram Rajan would not like to go for a policy cut ahead of the event. The second important event is the US Federal Reserve Policy meet, scheduled for the middle of the month.
It looks a possibility that the US Fed would hike interest rates in its policy meet latest by July. Again, if that were to happen it would be a big risk to cut interest rates before the event.
The other reason that the RBI may hold interest rates steady is because inflation has been trending up. For the month of April retail inflation jumped to 5.39 per cent, on the back of a large jump in food prices.
This may play on the RBI's mind, which is likely to hold interest rates steady, instead of cutting them. Another problem for the RBI is that the rupee has been falling. This has already made fuel more expensive with retail prices of petrol and diesel rising sharply just early this month.
Thus the rise in retail inflation, may not allow the RBI to hike interest rates in the neat future.