May see one RBI rate cut post Budget: JP Morgan

"On the one hand it is trying to highlight all the risks to inflation on food prices, coal prices, 7th Pay Commission, which is going to be a big problem going forward, but on the other hand, the RBI is also trying to sort of balance it out by saying that it is in the watch out. At any point if it sees there is some space, it could accommodate," adds Bhandari.

However, Bhandari rules out any more rate cuts now as she believes the central bank is worried about some macros.

"Their inflation target for early 2017 has been increased from 4.8 percent to 5 percent. That tells a lot, they are worried and I still see that even 5 percent is a bit rosy. It could well be a little above 5 as well. So, at this point, the RBI needs to guard it but it is trying to sound accommodative on the margin," she explains.

Transmission of lower rates

In a statement the RBI said it will shortly finalise the methodology for determining the base rate based on the marginal cost of funds, which all banks will move to.

"These moves should further help transmission of policy rates into lending rates. In addition, the on-going clean-up of bank balance sheets will help create room for fresh lending. The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 percent by March 2017," the report stated.

The RBI has cut repo rate four times (125 basis points) since January 2015. But the banks, Governor Rajan highlighted, had passed on less than half of the rate cuts to customers.

Ananth Narayan of Standard Chartered's says the bankers have been unsuccessful in conveying the rationale behind the lack of lower rate transmission to the Governor.

State Bank of India's MD Kumar Gupta says, "The question comes that the marginal cost is good but that is only on the fresh deposits that the bank gets, how do you apply it on the entire book of the bank. So one thought that is being floated around is that we can have a marginal cost which applies only to the new loans. That is something which probably can be tried. But again, there are issues like if all the marginal fresh loans are priced at a new base rate then what happens to the existing ones and then the customers always have an option to shift from one bank to the other, so all the marginal loans don’t remain marginal. Even the existing ones get repriced."

Hence, Gupta argues the transmission to the existing loans will become even more difficult if the new loans start getting repriced at lower rates.