The RBI cut repo rate by 25 bps to 7.25% as per market expectations. The reasons for cutting rates in this policy meet were:

·         Banks have started the process of policy transmission

·         Unseasonal rains have had limited effects on food inflation

·         Administered prices remain muted

·         Timing of US fed rate hike seems to have been pushed back

The policy however indentified some risks to inflation. The largest risk was in terms of possibility of below normal rainfall as predicted by IMD, which could lead to a spike in food inflation. Crude prices have also been firming up, which will put an upward pressure in inflation. Another risk would be in terms of increased volatility due to Geo political risks.

The RBI has indicated that it has frontloaded the rate cuts. Further rate cuts will remain data contingent.  RBI governor will be keeping a close watch on how the monsoon plays out, the crop production and the way the supply side is managed by the government in terms of buffer stock release, efficient logistics and pricing of agricultural grains.

The inflation target for Jan2016 has been revised upwards to 6% from 5.8% in the previous policy meet. Growth estimates have also been downgraded marginally to 7.6% for FY16 from 7.8% in the previous policy, with a downward bias to reflect uncertainties.

Taking the RBI’s 6% forecast for Jan 2016, it indicates a 1.25% real interest rate. Hence unless this inflation number is revised downwards, the room for further policy easing remains restricted. The governor has however acknowledged that investments remain low and growth remains below potential. Based on the growth-inflation scenario going forward, further action will be taken.

From the perspective of the index, Nifty is forming higher low – lower high formation on daily chart with previous swing low at 7,997 and high at 8,489. The 20DSMA has been consistently acting as a strong support which is placed at 8,305. The break below 8,250 can open the 8,100 but currently the index is expected to trade within the range of 8,200-8,500 unless proven otherwise.