RBI Governor Raghuram Rajan, said on 5 August that the central bank will cut interest rate provided it feels confident that inflation will remain below 6 per cent even after the reduction.
"We will cut rate when we see that even after the rate cut, inflation will remain below 6 per cent," Rajan said.
RBI expects retail inflation to be around 6.1 per cent in January-March, 2016.
"It should be actually below that. That is what we are looking for to see how much room we have (to cut rate)," Rajan told CNBC Awaaz.
RBI yesterday maintained a status quo on policy rate, but promised that the central bank could consider a reduction in rate ahead of the September 29 policy, depending on macro economic data.
Since January, RBI has reduced key lending (repo) by a total of 0.75 per cent in three tranches.
He said there is perception among people that inflation is rising because of increase in prices of milk and vegetables, which is "worrying".
Retail inflation stood at an 8-month low of 5.4 per cent year-on-year in June compared with 5.01 per cent in May. RBI tracks CPI, or retail inflation, in deciding its monetary policy action.
On the impact of a likely hike in interest rate by US Fed, Rajan said initially there could be volatility and flight of capital, but investors will return as prospects are good in India and it provides a "stable" investment option.
On growth prospects, Rajan said the current fiscal is expected to end with a growth rate of 7.6 per cent, which is a "strong growth".
Talking about the structure of the proposed monetary policy committee (MPC) and setting up of the Public Debt Management Agency (PDMA), Rajan said it would require legislative changes and could take years.
Rajan, on 4 August, favoured doing away with the veto power of the central bank chief in deciding interest rate, arguing that it would be better for a committee to decide the key rate rather than one individual.
In Budget, the government had proposed to set up PDMA to manage government debt and also to shift the regulation of government bond from RBI to Sebi. However, due to opposition from RBI, the proposal could not go through.