US brokerage Bank of America-Merrill Lynch on Tuesday said its sees the first rate cut this fiscal only in March next as inflation is expected to fall only by December end on a decline in commodity prices driven by the US Fed tapering.
"We expect inflation to peak off if the US Fed tapering contains oil and other commodity prices and reduces imported inflation pressures. This should support our call that the RBI will hold till December end," BofAML said in a report.
Accordingly, BofA-ML sees RBI cutting rates by 50 basis points in March next. Earlier in the day, wholesale price-based headline inflation jumped to a three-month high of 5.7 per cent in March on a massive spike in food prices, after falling since December.
BofA-ML said in near-term, the path of CPI inflation, will be determined by rising El Nino risks. For March, it expects CPI inflation to rise to 8.4 per cent as against 8.1 per cent last month.
"Although we fancy ourselves relentless hawks, we have been skeptical of the ability of RBI to control inflation in view of imported inflation from QE," the report said.
BofA-ML said the withdrawal of the QE should help the country through stabilising of commodity prices, even as it did not rule out a round of sell-off in emerging markets in the coming months as Fed tapering gathers pace.
The report forecasts the current account deficit to stabilise at 2.6 per cent in FY15 and 2.5 per cent in FY16 if the Brent crude stabilises at about $105 a barrel.
On the forex reserves, it said RBI may recoup the forex kitty to 10 months of import cover by FY17, which should also help the rupee back on a sustainable appreciation path in the two-three years.
BofA-ML expects the RBI to hold rupee at 60-65 levels if the dollar trades about 1.30 against the euro. "Although a favourable May 16 poll result could push the rupee to 57-58 levels, we think it will be difficult to sustain beyond 60," the report said.