BofA-ML sees 0.25% rate cut on March 19 to support growth

With inflation easing to a three year low and growth taking a hit, the Reserve Bank (RBI) is likely to reduce policy rates by 0.25% on March 19 when it will carry out the mid-quarter review, says a report by Bank of America-Merrill Lynch.

Bank of America-Merrill Lynch (BofA-ML) today said with possibility of GDP numbers coming down to below 5% for the December quarter, the Central bank may shift its stance to supporting growth from containing inflation.

"We grow more confident of our call of RBI switching to support growth from exclusively fighting inflation. January inflation, at 6.62%, came in well below expectations. Still, with the December quarter GDP growth set to dip below 5%, we expect the RBI to advance policy rate cuts (by 25 bps each) on March 19 and May 3," said the report.

Earlier this week, the Central Statistical Office surprised with its advance estimate, projecting a 5% GDP growth this fiscal, which could be the lowest growth rate in a decade after FY'02 when the economy grew by 4.3%.

The signals from factory output data also appear poor as IIP contracted by 0.6% in December, belying expectations that the economy had bottomed out.

The wholesale price index-based inflation eased to 6.62% in January, from 7.18% a month ago.

Inflation in manufactured items category witnessed a decline and stood at 4.81% in January, down from 5.04% in the previous month.

However, the BofA-ML report warned inflation may touch 7.5% during the second half of next financial year.

On the RBI's open market operations (OMOs) to tide over liquidity deficit, which this week has touched a whopping Rs 1.4 lakh crore, the report said the central bank is likely to pump in Rs 20,000 crore more through OMOs into the system in the remaining period of the fiscal.
"We continue to expect OMOs/CRR cuts and base effects to push up deposit growth to 15% by March from 13% now. High lending rates should continue to pull down lending rates to 14-15% from 16% now."

An OMO is an activity by a central bank to buy or sell government bonds on the open market.

In this backdrop, the lending rates are likely to come down by an additional 0.75% next financial year beginning April atop the 50-75 basis points in FY'13, it said.