With RBI's Monetary Policy Committee (MPC) postponing its meeting, the anticipation of policy rates are rising. Some brokerages feel there's room for interest rate cuts in the future and CLSA feels the same too. It is expecting RBI to hold the repo rate steady at 4 percent in this meeting, but by mid-FY22, expect a total repo rate cut of 125 bps, said the global brokerage.

The report pointed out an interesting shift of priority that RBI holds this time - government borrowings. It said the rates will be kept on hold most likely and the focus will be on borrowings.

According to a Bloomberg survey, bond traders expect the government to raise its borrowing estimate for the October-March period by Rs 1 trillion to Rs 6 trillion. If bond traders' fears of a raised borrowing requirement for the second half are realised, this would lift the full-year government borrowing estimate to Rs 13.4 trillion which is equivalent to 7.3 percent of GDP, explained the CLSA report.

The worries on the fiscal deficit are however looming across the Street, and the brokerage confirmed by saying that it could intensify in FY21 as the COVID-relief expenditure will lift the central fiscal deficit to 9 percent of GDP and the general government deficit to 11 percent of GDP.

Therefore, the need to rein in the deficit will limit fiscal options in FY22. This will leave the onus for stimulus on monetary policy despite the RBI’s current stance on holding interest rates steady.

As inflation will begin to trend lower in July-August on the back of favourable monsoon, expect relief on food inflation too. Declining inflation, fuelled with the current account surplus will facilitate a resumption of RBI monetary easing. "We forecast a 50 bps cut to 3.50 percent by end-FY21 and a further 75 bps cut to 2.75 percent by mid-FY22," the report said.

Another concern for the government would be rupee depreciation. CLSA explained that the exchange rate has enjoyed a reprieve in FY21 due to the current account swing to surplus but expect a renewed rupee depreciation in FY22 and FY23 on the back of huge fiscal and public debt overhang in view of prolonged COVID pandemic.