RBI's policy rate cut despite concerns over inflation

The RBI's second bi-monthly monetary policy meeting of the current financial year yielded no surprises for the market as the first rate cut of the financial year was implemented (the previous two cuts were in January and March 2015). Although Societe Generale previously acknowledged the rising risk of a rate cut, it was concerned about inflationary tailwinds. Analysts believe that not only would inflation perk up in May (data to be released on 12 June), it would eventually inch closer to the RBI's January 2016 headline CPI target of 6%. 

In fact, the RBI has revised upward its CPI expectation for January 2016 to 6% yoy from 5.8% yoy previously. Thus, in the event of the RBI staying on hold until January 2016, the real policy rate would tumble to 1.25% - below the lower bound of the central bank's official target range of real policy rate of 1.5-2% - unless the RBI decides to reverse its monetary policy stance toward the end of the year and raises rates as its expectations regarding the inflation trajectory materialise, notes Societe Generale.