RBI to cut repo rate in September

The recent drop in India's CPI inflation should help to assuage inflationary concerns at the central bank. In its latest monetary policy statement in early August, the Reserve Bank of India (RBI) noted that risks to inflation are "balanced", and the governor recently noted that the government's management of food prices has been good. 

In that context, the lack of an increase in MSPs in mid-July for the summer crops will help keep food inflation better anchored, as MSPs become valid from October 2015 onwards. The recent increase in onion prices is also being offset by drop in the prices of other vegetables, and recent imports from Egypt should help to keep a lid on onion prices. 

"Even for pulses, the government has announced it will meet the shortfall through imports. FY 15-16 average CPI inflation is forecasted at 5%. The central bank is on course to cut the repo rate 25bp in H2 15. On the balance of risks, although another inter-meeting rate cut cannot be completely discounted, expectation is tilted towards a rate cut at the RBI's next meeting at end-September", says Barclays. 

Recent volatility in the INR due to the weakening of the CNY by the PBoC is also likely to be a hurdle for an earlier rate cut. Therefore, although the RBI has reiterated that its policy actions will remain data dependent, our forecast remains a 25bp repo rate cut in September.