The Reserve Bank of India is likely to cut policy rates by 0.25 per cent and keep the cash reserve ratio unchanged at its policy review next week, on the back of slower-than-expected growth and more encouraging inflation readings, says a report by HSBC.
"From the RBI's perspective, the slower-than-expected growth and recently more encouraging inflation readings should pave the way for another 25 bps rate cut on June 17, but we do not expect a cut in the CRR with the liquidity deficit (as on June 12) hovering near the RBI's comfort level," HSBC said in a research note.
The foreign brokerage firm further said, "We will, nevertheless, not preclude the possibility that the recent weakness in the INR could keep the RBI on hold in June."
In the last policy announcement on May 3, the central bank had cut its key rate of lending, the repo rate, by 0.25 per cent.
"Following this policy rate cut, the room for additional monetary policy easing is limited, and we only expect one more rate cut of 25 bps. Next year, the RBI will need to hike rates again, in our view," HSBC said. HSBC expects another 25 bps cut in the July-September quarter as well.
Looking ahead, more progress on structural reforms, would help to gradually improve growth prospects. Moreover, stepped-up implementation of infrastructure projects expedited through the Cabinet Committee on Investment (CCI) will also help aid the recovery, the report said.
However, the recovery is likely to prove to be very protracted as it takes time for the reforms to kick in. Moreover, global economic weakness is likely to linger for a while, it added. Based on this, HSBC expects growth to recover to 5.5 per cent in FY14 and 6.6 per cent in FY15, according to the report.
India's economic growth rate slipped to a decade low of five per cent in 2012-13 on account of poor performance of farm, manufacturing and mining sectors.