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Bank of America Merrill Lynch (BofA) on Monday trimmed the country's economic growth estimates by 30 basis points to 7.4% for the current financial year as demonetisation of Rs 500 and Rs 1,000 notes is expected to hurt activity in December.
Besides, the global financial services major has lowered its GDP number by 30 bps to 7.6% for the next financial year (2017-18).
At the same time, BofA said the Reserve Bank of India (RBI) would cut rates by 25 basis points in the upcoming policy review on December 7, as the "conversion of black money into deposits allow banks to cut lending rates even in October-March busy industrial season".
BofA said it is relieved to hear RBI Governor Urjit Patel's comments that the banking regulator will review the CRR (cash reserve ratio) hike as soon as the government issues an adequate quantum of MSS (Market Stabilisation Scheme) bonds.
However, it noted that as CRR does not pay interest, banks would find it difficult to cut lending rates even if the RBI cuts lending rates by 25 bps in December.
"With RBI now set to shift from CRR hikes to the standard mix of reverse repo, T-Bills, Cash Management Bills and MSS bonds, that all pay interest, we continue to expect banks to cut lending rates (by 75 bps by September 2017) that holds the key to recovery," it added.
Over the weekend, RBI had asked banks to set aside 100% of the deposits between September 16 (weeks before the end of the income disclosure scheme) and November 11 (three days after the currency delegalisation was announced) as incremental cash reserve ratio balance with it.
In an exclusive interview with Press Trust of India, Patel had said that RBI has announced an incremental CRR of 100% "because of the large increase in deposits of banks on account of the return of Rs 1,000 and Rs 500 notes" and the decision would be reviewed immediately once the government issues adequate quantum of MSS bonds which they have promised to do.