Reserve bank of India monetary policy outlook

The weak Q1 FY16 GDP growth number raises the prospect of a rate cut in September, what with inflation remaining subdued. Moreover, recently one of the leading private banks in India, the HDFC Bank, announced a reduction in its lending rate by 35bp. As a result, it has reduced its lending rate by 65bp (in aggregate) in response to a total 75bp cut in the policy rate. If other banks follow suit, this would mean that transmission of policy rate cuts to lending rates by the banks would be nearly complete. Given that the lack of transmission was one of the important reasons cited by RBI Governor Dr. Rajan for keeping rates on hold, this could be an additional trigger for an early rate cut. 

However, food inflation continues to remain a challenge, what with prospects of monsoon weakening. Also, as the weak base effect starts waning from September, the RBI could still tread cautiously. Weak currency is an additional reason for RBI to remain on hold, especially if the US Fed decides to hike rates at the 17 September meeting. 

"We continue to believe that the next rate cut by RBI will take place at the December meeting. However, we do not rule out an earlier rate cut", notes Societe Generale.