Risks of a front-loaded rate cut loom amid India’s easing inflation

And more central banks jumping the easing bandwagon.

The Reserve Bank of India (RBI) will meet today to decide on rates.

According to a report by DBS, with the markets largely pricing-in further reduction in rates after Jan’s unscheduled move, the only point of debate is when the central bank will cut next and by how much.

DBS analysts say that as a base case, they do not expect a rate cut at today’s meeting. But risks of a front-loaded cut cannot be dismissed in midst of easing inflation, benign oil prices and more central banks jumping the easing bandwagon.

Apart from the decision, focus is on the policy guidance especially after the central bank called for high quality fiscal consolidation and pro-growth reforms back in Jan.

Here’s more from DBS:

On the policy outlook, the likelihood of sub-6.0% CPI inflation in FY15/16 and the RBI keen to keep the real policy rate at 150-200bps, there is room for 50bps more cuts by the June quarter.

Accordingly, we look for a 25bp cut each at the Apr and Jun meetings after the Budget. The relative outperformance of the rupee vis-à-vis trading partners and regional currencies also provide the headroom for an accommodative policy stance.

The RBI has been a net USD buyer in the spot and forward markets since Sep last year, in a bid to contain INR strength on the back of strong hot-money flows.

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