RBI's further rate cut expected as inflation undercontrol

RBI surprisingly cut its benchmark interest rates by 50bp to 6.75%. This is higher than a 25bp cut which was predicted by many analysts, and adds to a total of 75bp cut in H1 this year. RBI Governor Rajan said that the cut was a front-loading move, as the growth trajectory has waned as seen in recent exports and industrial production prints. 

In the meantime, Rajan said that focus now will shift to ensuring that the cuts are passed on by the banks. In fact, the government has been calling for Governor Rajan to do more to lower interest cost for businesses and provide more stimulus to the economy. The government's main argument is that inflation is now well behaved and much lower than the near 10% level when the Governor first took office about two years ago. 

"As CPI inflation has held at 3.7% y/y in July and August and below RBI's near term target of 6% by January 2016 and the longer term mid-point target of 4%, within the 2-6% band, further policy rate cut can be expected, said Commerzbank in a report. 

For USD-INR, it dipped by 0.3% following the announcement to around 66.15.