RBI may keep the key interest rates on hold in the upcoming policy meet as inflation for the second quarter has hastened to 5.7 percent and July-August prints may also stay high.
According to the global financial services major, the room for further easing by the Reserve Bank is dependent on the inflation path and make-up of the monetary policy committee.
"The second quarter (April-June) inflation hastened to 5.
7 percent year-on-year, with a high likelihood that July-August prints will also stay high. This diminishes the window to cut rates this quarter(July-September)," DBS said in a research note.
However, DBS expects a 25 bps cut in the fourth quarter of this year, "contingent on softening food prices and a dovish RBI candidate".
"Odds for this cut will however fall if these factors do not toe the line," DBS added.
For 2016-17 fiscal, there is a high likelihood that the 5 percent inflation target will be missed on demand pressures from higher public sector wages and firm rural demand due to a good monsoon.
Also important will be the make-up of the new monetary policy committee, which might limit the Governor's single-handed influence on policy decisions.
These factors will narrow the room for an extended period of accommodative monetary policy.
In policy review meet in June, RBI Governor Raghuram Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.
The industry is still hopeful of further rate reduction from the apex bank to boost investment.
"Markets price in around 50 bps of rate cuts over the next year. In the near-term, cautious and hawkish rhetoric at the August 9 review might lead to position adjustments. We look for the repo rate to be left unchanged this month," DBS said.
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