Will Governor Rajan follow up on early rate cut?

Following the RBI’s decision to cut interest rates at an unscheduled meeting earlier this month, a small majority of forecasters expect rates to be kept on hold at the scheduled policy meeting next week (Tuesday). But there are good reasons to expect further loosening. Governor Rajan has previously shown that, once he has decided on a policy change, he is willing to act quickly. In addition, lending rates have not yet budged, suggesting that policy rates may need to be cut by more to have an effect on the real economy. Finally, the rally in the rupee so far this year means that the RBI could take advantage of benign market conditions. Given all this, we think that there is a good chance of another 25bp cut in the repo rate next week.