India Economics:RBI strikes a soft note by sharply marking down inflation forecasts

As expected, the RBI kept the policy repo rate and its "neutral" stance unchanged,while marking down its inflation forecasts sharply (by 140bps for FY18) towardsthe range we were expecting. With this, we believe that the RBI has admitted thatinflation dynamics have changed. Yet it stopped short of giving a rate cut, in ourview for three main reasons. One, it remains uncertain on whether the currentdisinflation is transitory or long lasting. Two, it believes other steps on bankingand investment need to be taken before monetary easing has a positive impact ongrowth. Three, it worries that premature easing now may require a rate hike lateron. Considering all, we continue to expect a prolonged pause with risks of a ratecut in August. In the run up to the next policy meeting, we will be watching theprogress of rains and reservoir levels, daily food prices and details from the MPCminutes.