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The Reserve Bank of India (RBI)'s decision to hold the key policy rates unchanged did not come as a surprise but we are encouraged that the central bank seems to be slightly lesser concerned about the near-term inflation outlook, than it was about two months earlier.
The sharp correction in global commodity prices and the recent moderation in headline and core Consumer Price Index (CPI)-based inflation momentum have clearly improved the prospect of achieving the central bank's target of eight per cent CPI-based inflation by January 2015, without any further monetary policy action, in our view.
As the fiscal deficit and supply response from the government improve further, we think RBI will get an opportunity to cut rates by 50-75 basis points (bps).
We also believe RBI's views on a rate cut will be influenced by their assessment of the US Federal Reserve's rate outlook and the reversal of flows that this could trigger in emerging markets. If the inflation trajectory improves faster than currently anticipated, RBI would not hesitate to cut rates to support growth, but the central bank would not want such rate cuts to lead only to improving consumption growth. While getting India's growth back on track is critically important, it is even more so from a monetary policy perspective that a healthy mix between consumption and investment growth is sustained, critical to prevent macro imbalances from building up.
Ravneet Gill, CEO, Deutsche Bank India
