A 25bp cut likely from RBI

Now that the probability of a Fed hike has shifted to December, the RBI is in a much better position to implement a cut.  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. 

"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 is 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", says Societe Generale. 

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.

"However, unless there is a full-blown drought, food prices will not rise by enough to materially threaten the RBI's target of 6% inflation by January 2016. Average inflation for FY 16 is expected 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%", added Societe Generale.