The Reserve Bank of India (RBI) is expected to reduce its repo rate 25bps to 7.25% in its meeting on 2 June. It last reduced the rate in an inter-meeting move in March. CPI inflation remained subdued at 4.87% y/y in April. Core inflation, though marginally higher at 4.32% y/y, has remained within a narrow range of 4.15-4.47% in the past five months. Although we are concerned about the forecast of less-than-normal monsoon rain and the risk of larger increases in the Indian government’s procurement prices due to increased rural distress, it is believed that the currently low inflation and favourable base effects until August 2015 will prompt another rate cut next week.
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