RBI Governor Raghuram Rajan
Reserve Bank of India Governor Raghuram Rajan.

A global brokerage on Thursday said Reserve Bank of India (RBI) Governor Raghuram Rajan will most probably keep policy rate unchanged in the central bank's policy meeting on 4 August.

"We believe the RBI is likely to wait and watch how the monsoon season pans out and keep rates on hold in the August monetary policy meeting," Morgan Stanley said in a note, reports Business Standard.

The brokerage expects the RBI to be guided by the sharp increase in inflation rate last month.

However, Morgan Stanley projects inflation rate to come down to 4.9% by the end of the current fiscal year, giving enough legroom for the RBI to cut rates by additional 50-75 bps.

Morgan Stanley expects falling rural wages, decline in government spending, sluggish commodity prices and easing property prices to push inflation rate lower.

The retail inflation in the country had hit an eight-month high of 5.4% in June on rising food prices. The RBI had expressed concern over the rise in inflation last month.

Morgan Stanley expects the central bank to cut key lending rates by about 50-75 bps by March 2016.

The RBI had cut repo rate by 25bps to 7.25% at its June meeting, its third cut so far this year. However, the central bank kept the cash reserve rate (CRR) and the statutory liquidity ratio (SLR) rates unchanged at 4% and 21.5%, respectively.

Morgan Stanley said that domestic demand will remain a key driver of growth, with exports seeing a pick up "only gradually" in the second half of the calendar year.

"We believe that in order to sustain growth at 7-8 per cent levels, in the medium term the government will need to focus on addressing issues related to land, labour tax, policy regime related to infrastructure and overall ease of doing business," it said.

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