Reserve bank of India to cut policy rate by 25bp

With the US Fed deciding to remain on hold, the Reserve Bank of India (RBI) now has a window of opportunity to ease its policy rate a final time in 2015 before likely opting for a pause. A cut was expected at the December meeting, as with the Fed expected to hike rates on 17 September, the RBI would have had little time to observe the impact of that rate hike before its upcoming September meeting. Now that the probability of a Fed hike has shifted to December, the RBI is in a much better position to implement a cut. 

It is believed that the RBI will act because inflation is, structurally, on an easing path rather than because the government has increasingly been demanding a cut. The RBI justifiably expects inflation to pick up from September onward given the base effect. The other big concern is the progress of monsoon. Despite plentiful rainfall in June, the overall rainfall deficit (16% below the long-period average for the June to mid-September period) remains worrying. 

"Unless there is a full-blown drought, we do not think food prices will rise by enough to materially threaten the RBI's target of 6% inflation by January 2016. We expect average inflation for FY 16 to be around 5.2%, which would mean that the real policy rate would be within the RBI's comfort zone of between 1.5% and 2%", says Societe Generale.