Will the rupee prevent policy loosening?

Markets seem certain that the RBI will keep interest rates on hold next week, but we are not so sure. Inflation has fallen much further than most had expected, GDP growth is still weak by past standards, current account vulnerabilities have declined, and Governor Rajan has previously shown that he is willing to surprise markets. One factor that some commentators have suggested could yet prevent policy loosening is the recent weakening of the rupee. But, in reality, the falls in the currency have been small. Given all this, we think that there is a good chance of rate cuts next week.