The Reserve Bank of India's monetary policy decision to keep key policy rates on hold, strangled the rupee further against the dollar, making it dip to an all-time new low against the dollar. "However, there is a probability that the central bank would change the stance from "neutral" too, as three successive rate hikes with a "neutral" stance could contradict the RBI message", the report said.
If the RBI does raise rates, Garg said it could do so in either a "neutral" or "hawkish" manner.
Taking various factors into account, the RBI has lowered its inflation projection for the July-September quarter to 4.0 per cent, and between 3.9-4.5 per cent for the second half of the fiscal "with risks somewhat to the upside".
The reverse repo rate stayed at 6.25 percent.
The decision taken by the RBI surprised the market given a wide belief that India's central bank would increase the benchmark interest. Turbulence in global stock and commodity markets and one-way shifts in currency flows in the wake of reversal of quantitative easing increasingly put pressure on the rupee. One economist expected a 50 basis point hike to 7%.
"The RBI policy meet is the key event and the market is pricing in a 25 bps hike", said Vinod Nair, Head of Research at Geojit Financial Services.
On Friday, the RBI belied market expectations of a rate hike.
Five of the six members voted to leave the rate unchanged this time, after the panel raised them by 25 basis points at each of its two previous meetings since June. The rupee has been in freefall in the year so far owing to capital outflows as foreign investors rerouted funds from emerging markets like India to safe havens like the USA, where the Federal Reserve is tightening rates. "We thought the RBI would give some thought to supporting the rupee in a pre-emptive move to curb future inflationary pressures, however, in the end, we and many others were wrong". "With the USA yield inching up to 3.25 percent, it was expected the RBI would increase the rates to protect against the inflation rise".
The lowering of inflation risks were exclusively based on food inflation momentum which according to RBI over weights increase in household expectations, higher input & selling prices, sharp increase in crude oil prices and currency depreciation by ~6%.
India's wholesale inflation fell to a four-month low of 4.53 per cent in August on softening of food prices.
"Thirdly, volatility in global financial markets continues to impart uncertainty to the inflation outlook".
However, there will likely be further rate increases ahead.