Contrary to market expectations, the Reserve Bank of India (RBI) governor Raghuram Rajan is likely to cut key policy rate by 25 bps at a meeting on 4 August on the back of subdued outlook for inflation and falling commodity prices, according to a research firm.
"The Reserve Bank of India could deliver fireworks in its monetary policy meeting on Tuesday by cutting the repo rate by 25 basis points to 7 per cent," said Moody's Analytics, a subsidiary of a global rating agency.
Markets are widely expecting the central bank to keep policy rates on hold at the meeting, waiting to see a final outcome of monsoon rainfall.
The RBI had cut repo rate by 25bps to 7.25% at its June meeting, its third cut so far this year.
Moody's said that the initial forecasts of poor monsoon rainfall this year are proving to be wrong, as the rainfall witnessed so far is close to the "long-term average".
The Indian Meteorological Department (IMD) had earlier estimated that the country to see deficient monsoon rainfall for the second consecutive year, raising fears of drought and a spike in food prices.
Moody's said that there is considerable improvement in sowing of kharif crops after the rainfall turned out to be better-than-expected.
"There have been double-digit increases in areas sown compared with the last year for major kharif crops. And although the monsoon season is not over yet, we believe RBI has an opportunity to stay ahead of the curve and cut rates because better food supply will likely cap inflation," Moody's Analytics told NDTV Profit.
The research firm said the inflation to remain under check from a decline in global crude oil prices as a result of agreement between the Western powers and Iran over Tehran's nuclear programme.
"This would help ease RBI's concerns of rising fuel costs. Overall, the subdued inflation profile suggests RBI should lower rates and focus on economic growth," it said.
Moody's also said that the private investments in the country have failed to pick up due to a deadlock over the key reforms.
In addition, the firm said that manufacturing momentum is weak, with automobile sales slowing. The credit growth is also not showing any "secular upward trend", it said.
"But we believe that favourable supply-side developments in recent weeks prescribe another rate cut in August," it added.