Even though the chances of an interest rate cut by the Reserve Bank of India (RBI) in its meeting on 4 August appear slim, the probability of it beyond the next month is rising.
In its previous meeting in June, RBI Governor Raghuram Rajan had highlighted below-normal monsoon rainfall, firming crude oil prices and volatility in external environment as key risks for the bank in going for further rate cuts.
But in the recent weeks, these risks seem to be easing, increasing the scope of RBI rate cuts in the second half of the year.
"We expect the RBI's monetary policy stance to turn softer in August as we feel that the probability of another 25bp repo rate cut later in H2 2015 is rising," said Barclays Capital in a note.
In June, Rajan had cautioned that the outcome of monsoon rainfall is the biggest risk ahead for the economy.
So far, the monsoon rainfall in the country has turned out to be better than the forecast made by the India Meteorological Department (IMD) in early June.
"While the geographical distribution of rainfall has not been ideal, the overall monsoon picture appears considerably better than was suggested by the IMD in early June," said Barclays.
Another area where the RBI governor can take comfort is a decline in global crude oil prices. Currently, the Brent crude oil prices are trading $54 per barrel compared to $65 a barrel in early June.
Analysts expect crude oil prices will take a long time to stabilise, as oversupply issues continue to hit the oil market. Even if they recover, there is risk of resumption in the US oil production at those prices. Such a trend is expected to keep a cap on oil prices.
The unexpected sharp rise in the country's inflation rate to 5.4% in June is estimated to ease in the coming months, as lower crude oil prices will result in lower food prices.
Easing inflation may increase the possibility of RBI cutting its key lending rates.
"We continue to expect the repo rate and reverse repo rate to end the year at 7.00% and 6.00% respectively, with the final 25bp cut in this cycle potentially coming in the subsequent meeting in October," said Capital Economics.
In addition, the heightened volatility witnessed in global financial markets in early July due to a crisis over debt-ridden Greece has been reduced in the recent weeks.
Stability in the external environment will also provide a scope for the RBI to ease policy further in the coming months.
However, a significant risk for the RBI rate cuts is the growing expectations on interest rate hike by the US central bank in September.
The RBI may stay on hold if the US Federal Reserve starts raising rates in September to contain the outflows and arrest a possible slide in the rupee.