What will the RBI's next move be?

Bloomberg | Getty Images

With India's consumer price inflation easing to a record low, what are the odds of the central bank pulling the rate-cut trigger when it meets on Tuesday?

Economists say the Reserve Bank of India (RBI) will almost certainly hold fire as the weak monsoon and uncertainty around the outlook for oil prices due to geopolitical tensions threaten a revival of price pressures.

"The RBI is likely to pause at Tuesday's policy review. We believe it is early to factor in rate cuts given risks to the inflation outlook," Radhika Rao, economist at DBS Group Research wrote in a note.

"Also notable is the tail risk from an earlier-than-expected U.S. Federal Reserve's push to hike rates, which can revive uncertainty. In light of these factors, we expect the RBI to keep rates on hold in August and rest of the year," she added.

RBI Governor Raghuram Rajan, who raised rates three times since taking charge last September, held benchmark interest rates at 8 percent at the June policy meeting. However, he gave off a dovish tone in June.

Read MoreFive reasons why India's rebound is real

As such, cooling inflation coupled with the RBI's dovish policy statement and the new government's commitment to containing price pressures fueled some expectations of future policy easing.

Since the RBI's last policy meeting on June 3, markets have traded with a dovish bias, pricing in 50 basis points of rate cuts over the next 12 months, according to Goldman Sachs.

However, Tushar Poddar, economist at Goldman Sachs says near-term rate cut expectations are overdone, highlighting that the fight against inflation has not yet been won.

India's consumer price index climbed 7.31 percent on year in June - the slowest rise since figures were first published in January 2012 - helped by cooling food inflation and a favorable statistical base.

Read MoreMonsoon: the new threat in India's inflation battle

Meantime, the wholesale price index, another closely watched inflation gauge, rose 5.43 percent, slower than May's 6.01 percent rise.

"First, the central bank has set a de facto inflation target of 8 percent by January 2015 and 6 percent by January 2016. The 6 percent target is particularly aggressive, and given the RBI's need to establish the sanctity of these targets, as well as its own credibility, it does not leave much room for easing unless these targets are clearly in sight," said Poddar.

"Second, despite the recent improvement, the monsoons remain significantly below normal," he added.

Monsoon deficiency stood at 23 percent at the end of July, according to the Indian Meteorological Department.

In 2009,when the monsoon rainfall was 22 percent below normal, the WPI food index increased from 8 percent year on year in March 2009 to 21 percent by February 2010, according to Goldman Sachs.

Read MoreFormer RBI governor: I would give Rajan A+ rating

As such, Poddar believes the RBI is more likely to hike rates in the last quarter of 2014 in response to a flare-up in inflation rather than cut rates.

"We think that the RBI will err on the side of caution, and that its statement at the upcoming meeting is likely to be more hawkish than the last policy statement," he said.