The Reserve Bank of India lowered its policy repo rate on Wednesday. The RBI cut its key interest rate by 25 basis points. Coming against the backdrop of unusually low inflation and sluggish growth, the interest rate cut was broadly expected.

Four monetary policy committee members voted in favour of a 25 basis point reduction, while one voted for a 50 bps cut and one voted for no change. The RBI, in its policy statement, acknowledged that realised inflation has almost consistently dropped as upside risks have greatly not materialized or have decreased.

The central bank’s tone on growth was cautious. The central bank highlighted that space for easing has opened up given the dynamics of the output gap. It noted that the underlying growth in industry and services has subdued. This is contrary to the June policy review when some members of the MPC expected the output gap to narrow gradually.

The central bank noted that the ongoing abatement in core inflation might have the upside pressures on headline inflation. The inflation trajectory is expected to be benign due to good progress in the monsoons and excess capacity in the manufacturing sector, said ANZ in a research report. But the RBI has remained wary in the implementation of farm loan waivers and higher salary and awards by states that might entail higher inflation on an 18-24 month horizon.

However, considering the tight financial position, only a few states would be able to implement a rise in salary payments, noted ANZ. Moreover, higher fiscal deficit by the states due to farm loan wavers, should be non-inflationary as the additional debt is unlikely to be monetised.

“Overall, we expect another rate of 25bps in the next review scheduled for early October”, added ANZ.