Moody’s Investors Service today said the 0.25 per cent cut in the policy rate by RBI is in line with market expectations and cautioned that inflation could rise in the event of unfavourable monsoon and a sharp currency depreciation.

In its first bi-monthly monetary policy review for 2016-17, RBI has projected consumer price-based inflation to be around 5 per cent during the fiscal.

Moody’s said moderate growth in India, spare capacity in industry and low global commodity prices will help maintain inflation around the current levels.

“Inflation could rise if unfavourable weather pushes food prices again this season, if the rupee were to depreciate sharply or, and most relevant, if the gradual implementation of the Pay Commission’s salary increases leads to widespread wage and price increases,” said Marie Diron, Senior V-P Sovereign Risk Group, Moody’s Investors Service.

The 0.25 per cent cut in the RBI’s policy interest rate is in line with expectations by market participants, Diron said.

Moody’s said factors such as liquidity provision and progress towards cleaning up banks’ balance sheets will determine financing conditions.

“The latter is a multi-year process, the success of which will be key to unlock lending and investment in India. In turn, this would contribute to sustained robust growth,” Diron said.

Moody’s said it is via sustained GDP growth at or above the current levels that fiscal consolidation is likely to be achieved rather than through broad-ranging reforms of public spending and revenue-raising measures.

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