Kristin Forbes, one of the nine rate-setters on the Bank's Monetary Policy Committee (MPC), signalled she was inching closer to voting for a rate hike after becoming increasingly "uncomfortable" with surging inflation given the economy's resilience since the Brexit vote.
A survey of economists from 10 banks conducted by the Mint newspaper says that slowing inflation and a fiscally responsible budget could prompt the RBI to cut interest rates. As a base case, we look for a 25 basis points rate cut in the repo rate to 6.0 percent on Wednesday.
She said: "I believe that the MPC should be nimble and willing to quickly adjust the appropriate path for monetary policy in either direction as needed throughout this period - even if it means reversing recent adjustments to bank rate".
While announcing its monetary policy review last month, the RBI, acknowledging the demonetisation factor, lowered its gross value added growth estimates for the current fiscal to 7.1% from 7.6% forecast earlier. The lower interest levels should allow better transmission of the RBI's rate cuts, totalling 175 basis points since January 2015.
The analysts are also expecting that RBI may also inform the impact of demonetisation and money circulation related numbers of February 8.
Since the December policy meeting, CPI inflation is well-contained.
Along with other measures like protection of cheap imports, the benefits of the ample liquidity in the banking system must be extended to the firms grappling with the old loan books without much delay, it said.
Ms Forbes said even if the Bank did raise rates, the other measures launched previous year to boost lending to households and businesses would "still leave a substantial amount of monetary support for the economy".
"Although the Fed is expected to only gradually raise rates in 2017, pressure on emerging market currencies will remain and we expect the RBI to emphasise this while setting policy", he said.
Finance Minister Arun Jaitley while achieving fiscal deficit target of 3.5% set by the government the fiscal, said that for the next financial year, fiscal deficit target would be set at 3.2% of GDP.
Industry body Ficci's views were in line with SBI's research arm, saying that it expected the RBI to maintain status quo and cut rates in the first half of the next fiscal.
"As a majority owner of the banks and as a regulator, both the government and the RBI have roles in advising banks to pass on the commensurate reduction in the interest rates".