Reserve Bank of India's rate cutting cycle not over yet

RBI opted not to follow up on March's unscheduled rate cut in today's policy review, with the repo and the reverse repo rates being kept on hold at 7.50% and 6.50% respectively. But this is likely a temporary pause, and that the loosening cycle will resume again before long.

The RBI gave two key reasons for its pause. The first is that it is still waiting for banks to pass on previous reductions in policy interest rates to lending rates. The second is that it is waiting to assess the full impact of the recent unseasonable rain in the north of the country, which has damaged local crops and could push up food inflation.

Accroding to Westpac research, there are reasons to think that further RBI rate cuts are still likely. For a start, although it is now forecasting GDP using the new series, the RBI continues to question the picture that series paints of a robust economy, noting in today's statement that "leading and coincident indicators suggest a downward revision of these estimates when fuller information on real activity... becomes available". 

Meanwhile, inflation remains below the RBI's 6.0% target for next year and, despite the effect of the recent rains, price pressures look set to remain subdued, helped in part by lower oil prices and weak core pressures.