India Inc is also pitching for a rate cut to boost GDP growth that fell to 7.1 per cent in 2016-17 from 8 per cent in the previous fiscal.
Inflationary pressure subsided over the past two months with Consumer Price Inflation (CPI) that examines the weighted average of prices of a basket of consumer goods and services, cooling to 2.99% Year-on-Year (YoY) in April from an average of 4.5% YoY in FY17. Some bolder investors are even betting on possible future rate cuts. In its April meeting, the RBI hiked the reverse repo rate-an instrument of draining out liquidity to 6 per cent.
Ahead of the next monetary policy, Reserve Bank Governor Urjit Patel today called on Finance MinisterArun Jaitley and believed to have discussed various macro-economic issues, reported Press Trust of India.
Significantly, however, the RBI cut its projection for consumer inflation to 2-3.5 percent in April to September, down from 4.5 percent earlier, and to 3.5-4.5 percent in October to March, down from 5 percent earlier. Retail inflation had dropped to 2.99 per cent in April from 3.89 per cent in April.
At the same time, the RBI cut banks' statutory liquidity ratio - the amount of bonds they must set aside - by 50 basis points to 20 percent of total deposits starting on June 24.
"We don't expect any change in the official neutral stance in June but we do expect RBI to tone down its hawkishness compared to the April and February policy statements", said Siddhartha Sanyal, chief India economist at Barclays.
According to rating agency ICRA, RBI is unlikely to cut rates in its policy review but the tone of the statement will be less hawkish than the previous one.
The Indian market closed lower on Tuesday largely due to investors booking profits prior to the Reserve Bank of India's (RBI's) Monetary Policy meeting on Wednesday, according to media reports.
If seen as a rigid policy rule, there seems a solid case for the RBI to hold headline rates steady.
Government's contention with RBI first started over the manner in which it handled the Election Commission's request to allow higher cash withdrawal for assembly elections candidates in Uttar Pradesh and four other states, to which RBI had said no.
Separately, the RBI has reduced the standard asset provisioning requirement for home loans from 0.4% to 0.25% - a move which will prompt banks to push such loans by reducing the interest rates.