Many experts say interest rates should be cut as there is no uptick in output growth and consumer price inflation is low.
If the Union Budget on February 1 keeps the fiscal deficit within target, the case for a rate cut is strong. A populist budget will provide the RBI with a reason to not cut rates.
Last week, Finance Minister Arun Jaitley expressed his unhappiness at high interest rates.
However, new RBI governor Shaktikanta Das may be inclined to demonstrate his independence from the government by not voting for a rate cut. He could cite various risks such as core inflation, fiscal expansion and US rate hikes.
The country has seen a low inflation environment for the past four years. Given low pressures on demand from investment and consumption growth, inflation could fall even below the 2 per cent band around the target.
Industry bodies say policy measures are required to ease the tight liquidity situation by effecting a cut in cash reserve ratio (CRR) by at least 50 basis points (bps). CII says the RBI must take measures to facilitate flow of credit to industry, especially to MSMEs and the infrastructure sector.
FICCI says a reduction in repo rate and CRR will help in reviving the investment cycle. It will also boost consumption and support growth.