The Reserve Bank is expected to maintain a status quo in the upcoming December meet and will go for a 25 bps rate cut each in its February and April policy review meetings, says a Bank of America Merrill Lynch report.
According to the global financial services major, the accommodative policy stance of the central bank would be largely driven by weak global growth and the fact that inflation is expected to be on track to its March-2017 target of 5 per cent.
“We expect the RBI MPC to pause in December and cut 25 bps each in February and April,” Bank of America Merrill Lynch said in a research note.
The report noted that there are ‘five compelling reasons’ for a 50 bps RBI rate cut by April.
First, growth is weak at sub-5 per cent in old GDP series (7.1 per cent in new GDP), well below its estimated 7 per cent potential, second, inflation will likely slip to 4.1 per cent in October, on course to the RBI’s 5 per cent March-2017 target.
Other reasons being, 50 bps RBI rate cut in early 2017 should send a clear signal to banks to cut lending rates, while RBI rate cut expectations should support the Indian rupee (INR) by attracting foreign portfolio investors inflows into bonds and rate-sensitives.
Finally, the bankruptcy code and Goods and Services Tax (GST) legislation should convince the RBI MPC of the government’s pursuit of reforms.
MPC, which has three members nominated by the government and the rest from RBI, had lowered the repo rate to 6.25 per cent from 6.50 per cent at the end of two-day deliberations on October 4.
The next meeting of MPC is scheduled on December 6 and 7.