Further rate cuts are on the way

The Reserve Bank of India (RBI) shocked markets earlier this month by cutting its main policy rates at an unscheduled meeting. The accompanying statement also paved the way for further policy loosening. Indeed, with the latest data showing that both economic activity and inflation remain subdued by past standards, another 25bp rate cut at the scheduled meeting on 3rd February seems likely. Further out, we still expect the repo and reverse repo rates to end the year at 7.00% and 6.00% respectively, 75bp lower than where they are today. By contrast, the consensus is for the repo rate to end the year at 7.50%.