The Reserve Bank of India is likely to cut its policy interest rate by 25 basis points on Thursday, despite some analysts believing the country's weakening economic growth and subdued inflation outlook warrant a larger reduction.
The RBI's six-member monetary policy committee (MPC) began its three day review on Tuesday, and most analysts expected it to take a cautious approach given uncertainty over who will lead the government after the coming election and what their fiscal policy will be.
Campaigning for votes, political parties have been promising dole-outs including direct cash payments to poor people if they win power, stoking potential inflation fears.
The inflation outlook could also be upset by the perennial risk of sharply higher food prices if the monsoon season rains disappoint.
With that in mind, more than 85 percent of the nearly 70 economists polled by Reuters expected the RBI to cut its benchmark lending rate, the repo rate, by 25 basis points to 6.00 percent on April 4.
Yet, India's debt market appear to have priced in a 50 basis-point cut. Trading at 5.90 percent, the one-year interest rate swap works out at 5.75 percent on a daily basis, putting it 50 basis points below the current repo rate, according to rate derivative dealers.