RBI's repo rate likely to remain unchanged

The RBI is expected to remain on hold at its bimonthly monetary policy meeting on 4 August. Although production data continue to remain anaemic and growth concerns persist, we believe the RBI would still be more worried about how inflation pans out. 

The bank's focus will continue to be on the developments on the monsoon front. As the initial euphoria of above normal rainfall during the first three weeks of June gives way to despair following a notable rainfall deficiency in the subsequent four weeks, there are rising concerns about the impact of deficient rainfall on food and hence headline inflation.

While the situation improved during the week of 23 July to 29 July 2015, the country as a whole remained pretty much in deficit in July, with south and central India virtually experiencing a drought-like situation. The IMD (Indian Meteorological Department) feels that the recent improvement in monsoon activity may not last long. 

"This may spell trouble for crops already sown - especially oil seeds and pulses whose prices can surge quickly. Nevertheless, while we do see some potential tailwinds for inflation, we are convinced that headline inflation will remain close to the RBI's immediate target of 6% by January 2016", says Societe Generale.