More Rate Cuts in India-Moody's Analytics

RBI is likely to cut the repo rate by 25 basis points to 7% in its monetary policy meeting

The Reserve Bank of India could deliver fireworks in its monetary policy meeting Tuesday by cutting the repo rate by 25 basis points to 7%. On the demand side, the economic engine has yet to fully fire without key reforms. Thus, private investment has remained on the sidelines. Other partial demand indicators are also supportive of this assessment: Production momentum is weak, auto sales are low, and a secular upward trend in credit growth remains elusive. But we believe the favourable supply-side developments in recent weeks prescribe another rate cut in August.

First, dim forecasts of below-average rains have not come to fruition; rainfalls have been closer to the long-term average with encouraging signs for kharif crop sowing. There have been double-digit increases in areas sown compared with last year for major kharif crops. And although the monsoon season is not over yet, we believe the RBI has an opportunity to stay ahead of the curve and cut rates because better food supply will likely cap inflation.

Recent global developments also suggest limits to inflation pressures. Global commodity prices, particularly crude oil prices, have tumbled on the back of the Iran nuclear deal. This would help ease RBI's concerns of rising fuel costs. Overall, the subdued inflation profile suggests RBI should lower rates and focus on economic growth.

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