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MOSL: ECOSCOPE-RBI cuts policy interest rate, but maintains neutral stance-Favorable data to lead to another rate cut

​ECOSCOPE: RBI cuts policy interest rate, but maintains neutral stance; Favorable data to lead to another rate cut in October

In line with market expectations, the Monetary Policy Committee (MPC) decided to cut the repo rate by 25bp to 6%, but maintained its 'neutral' policy stance adopted in February 2017. The decision was taken with a majority of 4-2 votes. The move was in contrast to our fear that the central bank would maintain status quo due to the MPC's bias towards not changing rates (for more details refer to our monetary policy preview note).

As far as the economic forecasts are concerned, the RBI has maintained its FY18 real GVA growth and inflation forecasts at 7.3% and ~3.5%, respectively.

Although the RBI sounded extremely cautious, we believe it will remain data-dependent. Over the next two months, we expect retail inflation to remain below, but close to, 2%. We also expect real GDP to grow ~6.5% in 1QFY18 (refer our June economic activity report). Accordingly, we believe favorable data will prompt the RBI to cut policy rates again on 4 October 2017.