RBI to cut rates by 25 bps on Apr 5, 50 bps in FY17: BofA-ML

Reserve Bank is likely to go for a 50 basis points rate cut next fiscal year and out of this 25 bps cut may be affected in the policy review meet next month amid slackening economic recovery, says a report.

The financial services major said it estimated that old GDP growth slipped to 4.6% in the December quarter, well below our calculated 7-7.5% potential. Our lead industrial indicator is slipping as industrial production contracted for three consecutive months through January.

Declining inflation and negative industrial outlook have strengthened a case for RBI cutting interest rate in its first bi-monthly monetary policy for 2016-17 on April 5.

"We have raised our RBI rate cut forecast to 50 bps in FY17 from 25 bps earlier. We see 25 bps cuts on April 5 and in August. After all, the recovery is slackening," Bank of America Merrill Lynch (BofA-ML) said in a research note.

RBI Governor Raghuram Rajan on February 2, left the key interest rate unchanged citing inflation risks and growth concerns.

According to the global brokerage major, the onus of recovery is now on the central bank, as the government has stuck to its fiscal roadmap.

"The onus of recovery is now on RBI, with Finance Minister Jaitley cutting his FY17 fiscal deficit target to 3.5% of GDP, in line with the pre-committed fiscal path," the report said adding that small saving rate cuts should also help the monetary policy transmission.

The report, however, noted the scope for further RBI rate cuts is limited, as the repo rate, at 6.25%, would be well below medium-term average 7% CPI inflation.

Meanwhile, Rajan on March 12 said the government sticking to fiscal consolidation roadmap of reducing deficit to 3.5% of the GDP in 2016-17 was comforting. On how that would feed into monetary policy, he had said "wait and see".