The Reserve Bank of India is expected to cut key interest rates by 25 bps at its policy review meet on April 5, a Bank of America Merrill Lynch (BofA-ML) report says.
According to the global financial services major, the implementation of the 7th Pay Commission recommendations should support consumption demand in the country but would limit planned expenditure.
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"In response, we expect the RBI to cut rates by 25 bps on April 5 as the fiscal deficit is already low compared to history," BofA-ML said in a research note.
Reserve Bank Governor Raghuram Rajan on February 2 left key interest rate unchanged citing inflation risks and growth concerns, while pegging further easing of monetary policy on government's budget proposals.
Rajan said RBI "continues to be accommodative" but would look forward to the government's budget proposals on February 29 as also the inflation trend.
BofA-ML expects Budget 2016-17 to target a fiscal deficit of 3.8 per cent of GDP, a tad lower than financial year 2015-16's 3.9 per cent, but higher than the pre-committed 3.5 per cent.
As per the revised fiscal consolidation roadmap, the government proposes to bring down fiscal deficit from 3.9 per cent in the current fiscal to 3.5 per cent in 2016-17.
According to official figures, fiscal deficit -- gap between the government's expenditure and revenue -- in the nine months of 2015-16 worked out to 88 per cent of the annual target as against 100.2 per cent in the same period last fiscal.
The improvement was mainly on account of buoyancy in tax collections, which have kept revenue deficit in check.
According to the global brokerage firm, Budget 2016 will seek to balance growth and fiscal consolidation.
"We expect Finance Minister Jaitley to walk the tightrope between supporting growth and fiscal credibility on February 29," the report noted.