BofAML sees 0.25% rate cut by central bank in February

Says the softer oil prices will ensure a 0.75% cut through 2015

Foreign brokerage Bank of America Merrill Lynch (BofAML) on Friday said a "dovish" Reserve Bank of India will slash key interest rates by 0.25 per cent at the February review meet and will go for cuts of 0.75 per cent in 2015.

"The RBI policy stance is much more dovish...we grow more confident of our call of a February RBI repo rate cut," it said in a note here, adding there will be a 0.25 per cent cut at the February policy, while the softer oil prices will ensure a 0.75 per cent cut through 2015.

At the monetary policy review earlier this week, RBI Governor Raghuram Rajan chose to hold rates, saying it is premature to go in for a cut, but painted an optimistic picture, saying inflation is coming under control. However, he hinted of a cut in early 2015, once RBI sees conclusive evidence of change in inflation trajectory.

The sharp slide in global oil prices, which had a positive impact on inflation, could help RBI meet its six per cent consumer inflation target of January 2016, BofAML said, adding the price rate will further slip to 4.2 per cent for November, down from 5.52 per cent in October.

The correction in oil prices will also help the government finances, it said, adding the fiscal deficit will narrow by 0.20 per cent in FY16. The Centre's oil subsidy bill will fall by Rs 234 billion to Rs 400 billion in FY16.

The brent crude prices have dropped to five-year lows due to supply glut and a shift towards shale gas.

On the domestic currency, the note said RBI will hold the rupee in the 58-62 band against the dollar on the back of a relative comfort on the current account deficit as a result of the slide in crude prices.

BofAML said it expects the current account deficit to come in at 1.4 per cent of GDP for FY15 and inch up to 1.6 per cent in the next financial year.

The high CAD - 4.7 per cent in FY13 which came down to 1.7 per cent in FY14 through unconventional measures - was a key reason for the sharp drop in the rupee value against dollar in August last year.