British banking major RBS on Thursday said it expects the Reserve Bank to cut key rate by 25 basis points or 0.25 per cent in its monetary policy review next week, leaving the cash reserve ratio (CRR) unchanged.
"Our house view is that the RBI will go for a 25 bps cut in repo (the short-term lending rate) but will not cut the cash reserve ratio (which is the portion of deposits banks park with the RBI for solvency purposes).
Instead, it will continue doing open market operations to inject liquidity," RBS India Managing Director and head of markets Ramit Bhasin said.
Quoting from its survey, in which 109 clients, including corporates, banks, insurance companies and mutual funds participated, Bhasin said a large majority (80 per cent) of the polled clients expect a cut in the repo rate while the rest expect a CRR cut.
"We have never seen such unanimity on rate cut. Almost all of them expect either a cut in the repo rate or the CRR."
However, the market is very cautious on the long-term scenario and expects a cut of only 0.50 per cent in the repo rate till the end of 2013 as against the RBS' prediction of a 1 per cent cut, the RBI Managing Director said.
Bhasin said due to so many years of government inaction, expectations within the market are subdued, leading to a fatigue but traditionally the policymakers have delivered only when pushed against the wall, as is the case now, and hence they will deliver above the expectations.
He said factors like the commitment to rein in fiscal deficit, steps like the recent hike in railway fares, a cut in subsidies, inflation coming in the 6-7 per cent band, and the recent announcements on the fuel front, make it possible for a 100 bps cut through the course of the year.
"I think there would be a cut per quarter with some pauses in between to signal that we are not there in a rate cut cycle," Bhasin said.
Additionally, as the Finance Ministry takes pro-growth steps, there would also be pressure from the political side on the RBI to bring down lending rates, Bhasin said.
RBI Governor Subabrao will be announcing the quarterly credit policy review on Tuesday and analysts widely expect a 0.25 per cent cut in the key rates.
The RBI has maintained rates at a high level, citing the uncomfortable headline inflation, which has of late been showing signs of cooling off.
On the currency front, the survey findings said the rupee will appreciate marginally to trade at 52.75 per USD dollar by December. But RBS expects the Indian unit to gain more lost grounds and trade at 50-52 levels, he said.
Bhasin said an appreciation in the domestic currency will be possible largely because of a jump in capital inflows.