The Reserve Bank is likely to hit the pause button in its policy review meeting on Tuesday, but a 25 basis point cut is likely in February, says a Bank of America Merrill Lynch report.

According to the global financial services major, after the 25 basis points cut likely in February there is little headroom to cut rates, but the central bank will continue with its “accommodative” stance.

“We expect Reserve Bank of India Governor Raghuram Rajan to pause on Tuesday, given the 50 basis points cut last time. He should cut a final 25 basis points in February,” BofA-ML said in a research note.

Rajan had on September 29 effected a more-than-expected interest rate cut of half a per cent to spur the economy.

Retail inflation

Consumer Price Index or retail inflation is set to meet the under-6 per cent market in January, BofA-ML said, adding that though it will likely rise to 5.5-6 per cent in the March quarter on base effects, the “RBI should look through that”, it added.

Retail inflation stood at 5 per cent in October, while the one based on the Wholesale Price Index (WPI) contracted to 3.8 per cent during the month.

Although poor winter rains pose another threat, BofA-ML said it expects the Centre to use supply side measures rather than monetary policy to fight El Nino.

7th Pay Commission

Regarding the 135 per cent jump in house rent allowance for civil servants by the 7th Pay Commission, the report said that the markets and the RBI should look through the impact of the increase in imputed value of rentals of government quarters as it is purely notional.

The report noted that “the government will likely have to target, 3.9 per cent of GDP 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”.

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