RBI may opt for rate cut in Q4 15

With the Fed likely to announce its first tightening move by September, the RBI is expected to prefer to remain on hold until the hike actually takes place and see how the markets react to this potentially game-changing event. The RBI may not opt for a rate cut at this point in time as this would reduce the differential between the Fed rate and India's policy rate, thereby potentially triggering further outflows, says Societe Generale. While India's forex reserves remain comfortable (at 9 months of imports), the RBI would not want the war chest to be depleted in case it needs to fight off a potential contagion effect post the rate hike.

In addition, the pass through of the policy rate cut by the banks to their lending rates remains weak. The banks initially failed to respond to the previous 50bp policy rate cut, and it took sharp criticism from RBI Governor Rajan for them to react. By now, the RBI has reduced the policy rate by 75bp but the banks have barely passed on less than half of the total cut thus far, notes SocGen.

The RBI would prefer to remain on hold during this meeting, but if inflation pans out, another cut (of 25bp) is expected during the fourth quarter of 2015, states SocGen.