Declining inflation and negative industrial outlook have made the case stronger for a rate cut in the central bank's first monetary policy of the new fiscal.
Reserve Bank is likely to approach policy easing with caution and go for a measured cut next week amid recent bounce in global oil prices and partial implementation of a public sector wage bill, says a report.
The report by DBS said, a 25 bps cut is largely factored in with few quarters also discussing the possibility of a more aggressive 50 bps cut, but there is a little scope of a bunched up move.
"Given the recent bounce in global oil prices, partial implementation of a public sector wage bill and indications that the US Fed might resume rate normalisation in April/June, we see a little scope of a bunched up move," DBS said in a research note.
The declining inflation and negative industrial outlook have strengthened a case for RBI cutting interest rate in its first bi-monthly monetary policy for 2016-17 on April 5.
"The central bank might see credence in approaching policy easing with caution, with a measured cut next week," DBS added.
RBI Governor Raghuram Rajan on February 2, left the key interest rate unchanged citing inflation risks and growth concerns.
Meanwhile, RBI Governor Raghuram Rajan on March 12 said the government sticking to fiscal consolidation roadmap of reducing deficit to 3.5% of the GDP in 2016-17 was comforting. On how that would feed into monetary policy, he had said "wait and see".
The report further noted that while low inflation implies a broadly low rate environment, the central bank will be wary of the implications on savings, with the official leaning for real rates to be maintained between 1.5-2%.
DBS said price action will draw direction from next week's RBI rate review and five state elections starting next month.
The month long state elections that kick-start with Assam and West Bengal (first phase) going to the polls on April 4, followed by Tamil Nadu, Kerala and Pondicherry. These five states cumulatively make up 51 of the 245 seats in the upper house of Parliament.
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