RBI provides further easing, move to wait and watch mode

Reserve Bank of India (RBI) Governor Raghuram Rajan has chosen to cut interest rates for a third time this year, as continued disinflation provided room for rate cut.

• The RBI cut the repo rate by a quarter point to 7.25 per cent, lowered the reverse repo rate to 6.25 per cent and maintained the cash reserve ratio at 4 per cent. Low inflation from lower oil prices gave the RBI a green light: India's consumer price index was below 5 per cent in April, while wholesale prices have been deflating for six straight months.

Low domestic capacity utilization, slower recovery and subdued investment and credit growth, warranted rate cut in today's meeting, according to RBI.

Easing stance by RBI is well placed, since government is pursuing fiscal balancing.

Indian government recently raised service tax from 12.36% to 14% this year and planning to add another 2% ahead.

RBI's cut is welcome break for consumers, who are burdened with additional tax hike.

• In spite of today's rate cut, Mr. Rajan still sounds cautious about the broader trajectory of inflation and he actually lifted his January 2016 forecast for CPI to 6.0 per cent. Monsoon which is vital for India, clouds the inflation outlook along with oil price.

Since RBI has actually frontloaded a rate cut in today's meeting it is likely to wait and watch, how inflation behaves over the coming months, until impact of monsoon over prices clears.

INR has weakened against dollar. It is now trading close to 63.81, after trading as low as 63.6 per dollar this week. India's benchmark nifty has also failed to cheer the easing, down by more than 1%, now trading at 8342.