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Rediff.com  » Business » RBI to cut rates by 75 bps in 2015, starting Feb: Bank of America

RBI to cut rates by 75 bps in 2015, starting Feb: Bank of America

Source: PTI
October 08, 2014 16:08 IST
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RBIThe Reserve Bank is likely to cut rates beginning February as inflation is expected to reach the targetted 8 per cent by next January, says a Bank of America Merrill Lynch report.

RBI Governor Raghuram Rajan is expected to cut 75 basis points in 2015, beginning February, according to the global financial services major.

RBI would get the comfort of meeting its 8 per cent January Consumer Price Index-based inflation target, BofA-ML said, adding that ‘we expect the RBI to cut 75 bp in 2015 from February with inflation on course to 6 per cent in January 2016’. 

The central bank is likely to be on hold on its next policy meet on December 2.

The factors that are likely to lead to a rate cut early next year include bottoming of inflation, late rains and US Federal Reserve's rate hike expectations, it said.

Late rains would likely water reasonable winter sowing to douse agflation and finally, US Fed rate hike expectations should hold oil prices in check, it added.

In the recent past inflation has seen some moderation falling from double-digit figures in 2013 to 7.8 per cent, year-on-year, in August.

In the last monetary policy, Rajan left all key rates unchanged citing continued risks to inflation and difficult external situation especially on the geopolitical front.

For the fourth consecutive time RBI had kept key interest rates unaltered.

The short-term lending rate (repo) rate remained at 8 per cent, and the cash reserve requirement of banks at 4 per cent.

The report said: "Supply concerns are expectedly proving overdone.

“Second, the Rs 1,28,400 crore (Rs 1,284 billion) surplus with the RBI and coal fines or auctions should buffer the Rs 4,67,300 crore (Rs 4,673 billion) net borrowing programme from fiscal slippage."

BofA-ML expects the government to raise overseas investors investment limit in government bonds to raise the country's foreign exchange reserves.

"It should hike on-auction G-Sec limits by $5 billion to $30 billion, doing away with the separate limit for sovereign wealth funds, within the overall $81 billion FII debt limit," the report said.

FIIs have almost entirely utilised their $25 billion limit.

BofA-ML said separate SWF limits are not utilised as many SWFs invest in emerging market/India paper through FIIs.

The report sees the rupee at Rs 62 in December with the US dollar settling at 1.25/euro.

It does not expect RBI to fight a rising US dollar beyond 1.25/euro, although dollar/rupee accounts for 85 per cent of the country's trade.

"After all, it is simply not possible for it to offset cross-currency pressures from the greenback given limited forex reserves," the report said.

The American brokerage expects RBI to buy $35-40 billion by March 2016 to maintain 8-month import cover that is key to rupee stability.

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