Bank of America Merrill Lynch (BofAML) Thursday said that it expects the Reserve Bank of India (RBI) to cut key interest rates by 25 basis points either at the upcoming policy review in February or the one after that in April. On Wednesday, the apex bank maintained the status quo for the second time in a row on all key policy rates in its fifth bi-monthly policy review.
During the June and August policy reviews, the central bank had raised the repo rate or the rates at which the RBI lends to banks, by 25 basis points each time. “We expect the RBI MPC (monetary policy committee) to roll back at least 0.25% of the 0.50% rate hike, in February or April,” the US-based BofA-ML said in the statement.
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The RBI also remained hawkish and retained the “calibrated tightening” stance, which came as a disappointment to the market, which was expecting it to be changed this time to ‘Neutral’. According to the American brokerage, although the apex bank did not the stance of the monetary policy, governor Urjit Patel said there is a scope for commensurate policy action if inflation forecasts do not materialise.
Notably, the central bank has lowered its inflation forecasts for the second half of the current financial year 2018-19 to 2.7-3.2% from earlier 3.9-4.5%. The risks include crude prices and global financial markets, food prices and the impact of minimum support prices hike on inflation.
According to the brokerage, MPC’s inflation risks are proving “overdone” and the headline price increase number is expected to fall to 2.8%, on account of lower inflation on the agricultural front.
Further, it added that the headline inflation is expected to be at 3.7% in December, while the second half average will be 3.5%, which is lower than the 4% medium-term target for RBI. Moreover, it expects the growth to be impacted on account of tight liquidity that would aggravate the base effects, hinting that accommodating the growth concerns may result in the expected rate cut decision.