The Reserve Bank will pause at the next policy review and go in for a final 0.25 per cent rate cut in the December review on comfortable inflation, a foreign brokerage said today. “We continue to see a final 0.25 per cent RBI repo rate cut on December 6 after dovish Monetary Policy Committee minutes. The RBI should pause in October,” analysts at Bank of America Merill Lynch said in a note. The brokerage added there will be a “long pause” after the cut in December. The note said that inflation risks are being “overdone”, and a cool-off in price rise will be one of “compelling factors” that will make the RBI cut rates. Inflation, excluding the impact of house rent allowance which the RBI has said it will be overlooking in its policymaking, will come at between 2.75-3 per cent for August after accounting for the spurt in onion and tomato prices. The imported inflation component is also expected to ebb on lower oil prices and softer US dollar, it said. The output gap — wherein the RBI’s own capacity utilisation levels slipped to 74.1 per cent in March 2017 — is unlikely to close any time soon, it said, pointing out that high lending rates of the banks are an impediment.
Supporting RBI Governor Urjit Patel’s view on the need for banks to bring down lending rates, it said there may be a further 0.25 per cent reduction in rates by banks before October. It can be noted that RBI is mandated to keep the inflation at 4 per cent as a medium term target according to an agreement with the Government. It delivered a 0.25 per cent cut in rates at the last policy review, but asked the banks to work more on transmission of its earlier rate cuts.