RBI surprises with rate cut, also revises FY-16 growth forecast down

With India's domestic demand remaining weak and the external macro environment uncertain, the RBI was genuinely concerned about the underlying weakness in economic growth momentum. This is best exemplified by weak investment activity prompting persistent weakness in industrial production. 

The window of opportunity provided by the Fed as it postponed its move towards rate normalisation from September allowed the RBI to opt for a fourth rate cut in 2015. However, unlike the widely anticipated 25bp cut, the RBI decided to surprise the market by opting for a 50bp cut in the policy rate. 

The second successive year of monsoon failure also resulted in increased rural stress, further exacerbating the problem. As the release states, "with global growth and trade slower than initial expectations, a continuing lack of appetite for new investment in the private sector, the constraint imposed by stressed assets on bank lending and waning business confidence, output growth projected for 2015-16 is marked down slightly to 7.4 per cent from 7.6 per cent earlier." 

"In fact, the RBI's downward revised FY16 growth expectation of 7.4% is close to our growth expectation of 7.3%", says Societe Generale.