Four reasons why 25bps rate cut is likely on July 31

Slowdown in growth, benign core inflation, depreciating rupee and fear of inflation rising to 8% are the reasons which will prompt the Reserve Bank of India (RBI) to slash rates.

Post dismal industrial production data for the month of May, he sees the industry growing through a phase of pain for another six months. Industrial growth can revive only if lending rates cool off, he said.

"Money supply growth is 13.8% it needs to scale up to at least 15-16% before you see lending rates come off and industrial growth revive. So, the key to industrial revival today is the revival of money supply growth," he elaborated.

Meanwhile, he expects India’s GDP to grow at rate of 6-6.5% in FY13.

Below is the edited transcript of Sengupta’s interview with CNBC-TV18.

Q: Any more optimism building on what you saw with the IIP figures, the kind of PMI data we have been getting?

A: We actually cut our growth forecast to 6.2% from 6.5% because of two things, one is rains clearly beginning to disappoint and even if you see a turnaround from hereon the yields are going to get impacted because of the delays. Secondly, lending rates are not coming down as much as we hoped.

My view is that unless lending rates come down we are not going to see a turn around in the industrial growth either. We’ll probably see six more months of pain then assuming that lending rates come off by September we stick to our view that the economy sees a turnaround in the winter.

Q: What is your assessment of the monsoon situation right now because the MET department has been saying that things has improved considerably in the last 1 week 10 days, have you paired down your agricultural growth forecasts considerably?

A: Yes we have cut down to 1.5% of GDP from 3%. This assumes that rains normalize from here on as the MET says. If you see what typically happens is that if there is a delay in planting, yields tend to also get impacted.

The concern now is that if you leave aside the Ganga, all other rivers are also beginning to dry up. At the time you have the normal sowing you are facing pretty much dry ground. To that extent, we could have some recovery if rains do come back but overall the crops got to be lower than last year.

Q: Is any of this suggesting that if the government does manage to hike diesel prices in the last week of July before the next monetary policy, the RBI keeping an eye on growth plus some elbow room on the fiscal front, they could go ahead and surprise the market with a rate cut?

A: Yes, we have a contrarian view that the RBI will cut rates this time. Last time we had a view that they won't so we have a view that this time they cut rates. There are four reasons, one is growth has slowed far more than people thought. Core inflation is relatively benign, 5-5.5%. Thirdly, the rupee needs the support of growth expectations.

Otherwise the rupee keeps on depreciating because flows dry up and effectively you create inflation through the rupee route. Fourthly, if the harvest isn’t that good, if diesel prices actually do go up then inflation will touch 8% in the coming months.