RBI rate cut expected: Moody's

Terming the Reserve Bank of India's 25 basis point cut as per market expectations, credit rating agency Moody's Investors Service said on Tuesday a range of factors would determine financing conditions.

A range of factors will determine financing conditions in India, including liquidity provision and progress towards cleaning up banks' balance sheets, Moody's said in a statement.

"The latter is a multi-year process, the success of which will be key to unlock lending and investment in India. In turn this would contribute sustained robust growth," Moody's said.

According to Moody's, fiscal consolidation would happen only through sustained gross domestic product (GDP) growth at or above the current levels rather than through broad-ranging reforms of public spending and revenue-raising measures.

The rating agency said factors like moderate growth, spare capacity in industry and low global commodity prices will help maintain inflation at around current levels.

"Inflation could rise if unfavourable weather pushes food prices again this season, if the rupee were to depreciate sharply or, and most relevant, if the gradual implementation of the Pay Commission's salary increases lead to widespread wage and price increases," Moody's said.

Although India is relatively less exposed than some other emerging markets to global financial market volatility, it is not entirely immune to external developments.

"Exports have fallen over the past year, reflecting muted global demand. Moreover, portfolio inflows which had been resilient up to late 2014-early 2015 dropped sharply in recent months," Moody's said.

According to Moody's the increase in foreign direct investment (FDI) inflows provides stable financing for India's current account deficit.

"In addition, financing needs have diminished as lower oil prices in particular have contained the country's import bill. The combination of higher FDI and a narrower current account deficit is positive in an environment of volatile external financing conditions," Moody's said.