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Since his appointment at the end of July, Finance Minister P. Chidambaram has brought greater urgency to policymaking, backing a series of bold reforms that cost his coalition government an ally and reduced it to a minority last month.
Now, Chidambaram wants central bankers to take a few risks to help restore momentum to an economy stagnating near its slowest growth rate in three years.
The RBI, however, is not yet satisfied with New Delhi's fiscal consolidation measures and awaits more steps to reduce the deficit before it pulls the trigger on rates, officials close to policymaking said.
"There will always be pressure from the ministry, but we have to be clear in explaining to them the problems on inflation," said one RBI official, who declined to be identified due to the sensitivity of the matter.
"There is hardly any room to cut rates unless there is more action on the ground on reducing the fiscal deficit."
The best that New Delhi may get this month from the RBI is a gesture of support in the form of a cut in the cash reserve ratio (CRR) for banks that many in the market predict.
There is general acceptance that India's interest rates, among the highest in the world's major economies, should be cut at some point -- the question is when.
Officials at RBI headquarters on Mint Street in Mumbai and Chidambaram's aides in New Delhi have been arguing their corner in the run-up to the central bank's policy review on October 30.
With the policy repo rate standing at 8.0 percent, RBI Governor Duvvuri Subbarao would be even more reluctant to cut rates after data released on Monday showed inflation at a 10-month high near 8 percent, with worse expected in coming months.
The fiscal deficit is forecast by analysts to reach 5.8 percent for the financial year ending in March due to weak revenue and hefty subsidies, giving credit rating agencies one of several reasons to think about relegating India's sovereign debt rating to junk status.
Upward pressure on inflation was inevitable after New Delhi's decision to raise fuel prices. If it fails to come down before the next review in mid-December, Chidambaram could find it harder to persuade the central bank to cut rates, as the government is expected to return to the market for more borrowing to meet its fiscal shortfall.
"December will be a crucial time as the winter session of the parliament starts, and it is to be seen whether there will be supplementary demand for grants, additional borrowing, as these will fuel growth but also push up inflation," said another official close to policymaking.
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While Chidambaram has impressed investors with an aggressive slate of initiatives, including raising subsidised diesel prices and opening sectors like supermarkets to foreign players, he has more to do on the fiscal front to convince the RBI.
"We all along knew raising diesel prices would add to inflation. But they (RBI) were arguing for raising diesel prices. Now that we have done that, it is up to them how they wish to respond," one official with the ministry said.
Chidambaram has said more corrective measures are on the way, and one aide said they were imminent and could make it easier for the RBI to lower interest rates.
"Government is likely to take additional fiscal steps before the October 30 monetary policy, which should provide comfort to the RBI," said a ministry official.
The RBI cut its policy repo rate by 50 basis points in April to 8 percent in expectation that the government would follow with fiscal moves.
New Delhi did not begin to deliver until Chidambaram's initiatives last month, and with elections due in 2014, it will be hard for the coalition to countenance radical spending cuts.
INDEPENDENT...TO A POINT
This is Chidambaram's third stint as finance minister.
When he last held the portfolio, from 2004 to 2008, Subbarao was finance secretary, the senior-most civil servant in the ministry. The two are known to have a cordial relationship.
And despite his public calls for policy easing, insiders doubted whether Chidambaram has exerted heavy pressure on his former aide.
During a Reuters interview on Saturday in Tokyo, Chidambaram called for the RBI to take "calibrated risks".
He also said the decision is Subbarao's.
"Decision-making in life is about taking risks. That's my view," Chidambaram said. "But I'm not the governor."
While the RBI is not statutorily independent, it has in practice enjoyed a high degree of autonomy.
Subbarao resisted repeated calls from Chidambaram's predecessor, Pranab Mukherjee, to cut interest rates.
And Chidambaram, a lawyer known to make a forceful argument, sometimes clashed with Subbarao's predecessor, Y.V. Reddy.
During four years in office, Subbarao has been unafraid of taking a minority view. Minutes from the past seven quarterly monetary policy committee meetings show he went against the majority five times.
If past practice holds, Subbarao will go to New Delhi a few days before the October 30 policy statement to share his final views with Chidambaram.
Finance Ministry bureaucrats hope their former colleague will take on board the ministry's views, and contrasted the RBI chief's position with Federal Reserve Chairman Ben Bernanke.
"Subbarao is not a Bernanke who takes straight decisions without worrying about anyone," said one ministry official.
But, cutting rates now could undermine the RBI's inflation-fighting credibility.
Abheek Barua, chief economist at HDFC Bank, ditched his expectations for a rate cut this month after the inflation data.
"With 7.8 percent inflation, which is likely to go up further on fuel price impact, base effect and no comfort on manufacturing inflation, I think RBI will settle for a less-controversial decision of a CRR cut," Barua said.
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