Stage set for further modest loosening

It's not a done deal yet, but the balance appears to be tipped towards the Reserve Bank of India (RBI) delivering another interest rate cut in next week's policy meeting. This is due to a number of recent developments, including the finance ministry's tighter-than-expected fiscal stance in the FY16/17 budget, and the 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 seems unlikely, given the difficulties the RBI faces in meeting its inflation target for March 2017.