RBI expected to ease rates by 25bps by end-2015

Lower inflation would open room for easing.

While Maybank Kim Eng is expecting RBI to maintain the status quo tomorrow, it reckons the bank could ease rates by 25bps by end-2015.

According to a research note from Maybank Kim Eng, it expects inflation to drift down to the mid-point of the 4% plus or minus 2% agreed between RBI and the government.

With lower inflation, room for easing would open. Lower crude oil price will enable the government to achieve is fiscal-deficit target.

Here's more from Maybank Kim Eng:

RBI will keep rates intact, in our view. It would like to assess the impact of the deficit monsoon on CPI inflation. June CPI inflation reading of 5.4% was higher than in the last three months.

With benefits of a favourable base withering, CPI inflation may tick up from Sep 2015 onwards. However, it may remain within RBI’s 6% projection by Jan 2016.

We expect the policy tone to be dovish. Risks of sub-par monsoon are down as of now. As per India Meteorological Department (IMD) data, rainfall deficit from benchmark stood at 6% of long period average as on 24 Jul 2015.

With two months of monsoon season left, RBI will be vigilant. Fall in commodity prices especially crude oil will aid lower inflation. Since the last policy in Jun 2015, crude oil prices have dropped 19% from USD65 to USD52.

Growth has remained patchy. Core sector growth for Jun 2015 slowed to 3% vs 4.4% in May 2015. These factors would drive dovish guidance.