RBI may cut rates at February review, says BofA-ML

A day after the Reserve Bank held its rates unchanged, foreign brokerage Bank of America Merrill Lynch (BofA-ML) today said it expects RBI will go for a 0.25 per cent cut at the next review in February on inflation coming under control, lending rates being high and sagging growth.

It also hinted that fears over the impact of the seventh Pay Commission proposals are overdone, saying the monetary policy will not be "ham-strung" by it.

"We continue to expect RBI Governor Raghuram Rajan to cut a final 0.25 per cent on February 2," it said in a note.

Among the factors which will drive the RBI for the cut will be achievement of the 6 per cent inflation target in January, it said, adding that it expects the headline consumer price inflation to be at 5.5 per cent in November.

 

In its policy statement, the RBI had said that inflation will rise till December and is expected to plateau after that.

BofA-ML said the 7.4 per cent growth in September quarter (5.2 per cent under the old series) is much below its expectation of achieving up to 7.5 per cent growth for the fiscal 2015-16, which may prompt the central bank to give a boost through a rate cut.

Apart from this, it said the lending rates are expected to continue to be high, which is evident through the hardening of the benchmark yield, that may again result in some rate action.

On the impact of the implementation of the recommendations of the pay panel, it said it is "not really a risk".

"The government will likely have to target, say, 3.9 per cent of GDP (as) fiscal deficit -- higher than 3.5 per cent last year -- to fund the 0.7 per cent of GDP outgo due to the 7th Pay Commission.

"To that extent, the RBI may be disappointed in its expectation of the MoF sticking to the pre-announced fiscal path that was probably set without taking the Pay Commission effect into consideration," it said.

Rajan had yesterday said that meeting the Pay Commission recommendations is difficult but not impossible while adhering to the fiscal roadmap.

He had asserted that the RBI's stance continues to be accomodatory and it will wait for getting more room to deliver more rate cuts.