RBI is committed to bringing down retail inflation to eight per cent by January 2015 and six per cent by January 2016.
Though CPI-based inflation rose to 7.96 per cent in July from 7.46 per cent in June, it is seen stabilising in the months ahead.
“Lower inflation would enhance the efficiency of India's economy.
"A credible disinflation process would help lower long-term bond yields in anticipation of lower inflation risks and, ultimately, a meaningful sustainable reduction in policy rates,” said UBS Securities India in a note to clients titled '200 bps lower interest rates in less than 2 years', released on Thursday.
The note added that monetary policy would lag inflation and RBI will keep policy rates on hold till late FY15.
RBI had previously raised the repo rate in January, by 25 bps to eight per cent.
Since then, status quo has been maintained in the past three bi-monthly monetary policy reviews.
Some economists even feel the rate cut cycle might begin as early as the start of 2015.
“We see RBI cutting policy rates by 75-100 bps starting early 2015, even if US Fed chair Janet Yellen hikes rates from September 2015.
"In our view, RBI and Fed monetary policy is no longer synchronous,” said Indranil Sen Gupta, India economist, Bank of America Merrill Lynch.
Explaining the rationale for rate cuts, Sen Gupta believes the rate differential, at 800 bps, is already far higher than the average 460 bps since January 2003.
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