A decline in retail inflation to a record low in July has strengthened the expectations over lending rate cut by the Reserve Bank of India (RBI) Governor, Raghuram Rajan.
Consumer price inflation (CPI) fell to a nine-month low of 3.8 percent in July due to lower food prices and high base effect. The inflation rate stood at 5.4 percent in June.
"While our baseline scenario is of a cut (25bp) during Q4 2015, and we still stick to that view, there is now a non-negligible probability of a rate cut at the 29 September meeting," said Societe Generale in a note.
Rajan had kept the repo rate unchanged at 7.25 percent at a meeting on August 4. The central bank has also kept cash reserve rate (CRR) unchanged at 4 percent.
Further, analysts expect inflation to fall further in the coming months, owing to a slump in global crude oil prices due to oversupply.
"The encouraging July CPI inflation print not only reflected the favourable base effect but more importantly, weakening sequential momentum. High frequency data hints at further downside to inflation in August," Kotak Economic Research economists Madhavi Arora and Upasna Bhardwaj in their note to Livemint said.
Besides, China's yuan devaluation move has lessened the expectations over the interest rate hike by the US central bank in September, increasing the chances of RBI rate cut next month.
"If the rate hike is indeed announced during the 17 September Federal Open Market Committee (FOMC) meeting, the RBI would prefer to wait and evaluate the impact before embarking on a rate cut move," said Societe Generale.
However, the RBI will remain wary of weakening rupee, which fell to a two-year low on Chinese currency devaluation. Any sharp depreciation in rupee will curtail the scope of RBI rate cut in September.