Stars align for another modest rate cut

Developments over the past month have paved the way for the Reserve Bank of India to deliver another modest interest rate cut in its April meeting. For a start, the finance ministry pledged to maintain its fiscal deficit targets for the coming years in the FY16/17 budget, which the RBI had considered a pre-requisite for further monetary loosening. Since then, monthly data showed a drop in inflation in February. Given also that some calm has returned to global financial markets in the past few weeks, we think that the RBI will trim its repo rate by 25bp, to 6.50%. However, further loosening beyond this point seems unlikely, given the difficulties the RBI faces in meeting its inflation target for March 2017.