But the central bank warned that core inflation, which excludes food and fuel, could see volatility ahead. "If the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation," the RBI said in a statement.
Despite recent increases in CPI, HSBC believed further rate cuts were on the table.
"Beyond the August meeting, we expect the RBI to cut the policy repo rate by 25 basis points in Q4, if rains remain strong. This final cut is in line with the RBI's preferred real rate range of 1.5 - 2 percent. With this, the RBI would have delivered 175 basis points in rate cuts and we do not see space for more, given most drivers of disinflation have played out their parts over the last 18 months and only hard work via structural reforms can lower inflation from here on," the bank said in a note ahead of the policy outcome.
The central bank noted that the landmark Goods and Services Tax (GST) bill would raise returns to investment across various economic sectors and strengthen government finances.
Rajan did not believe GST implementation would push up inflation, calling it a "one-time adjustment" instead. Officials will need to monitor the impact so the adjustment doesn't become generalized inflation, he said.
Regarding gross domestic product, the RBI maintained its projection of 7.6 percent growth for 2016-17. Higher rural demand thanks to the monsoon as well as increased consumption from the higher salaries recommended by the Seventh Pay Commission would bolster momentum, it added.