RBI likely to hold rates in policy review this month: Report

The Reserve Bank of India (RBI) is expected to hold its key interest rate in its policy review due on Sep 30 and is expected to lower rates from February, a Bank of America (BofA)-Merrill Lynch report said Friday.

"We expect the RBI to begin to cut rates starting February with stable oil prices and INR providing comfort that CPI inflation will come off to 6 percent by early 2016," the BofA-ML report said.

Pointing to the factor of major concern for the RBI in its policy review, the financial services firm said the country's Consumer Price Index (CPI)-based inflation is peaking off and is expected to range around 7.5-8 percent in September.

While the Wholesale Price Index (WPI)-indexed inflation fell to a five month low of 5.19 percent in July, the CPI-based retail inflation rose marginally to 7.96 percent in July, from 7.46 per cent in June.

The BofA-ML report said the late monsoons underway should result in a good rabi crop that should help reduce food inflation.

In the latest monetary policy review last, RBI kept the policy rate static at 8 percent citing the risk of inflation in view of uncertain monsoon and its impact on food production as also volatile international oil prices. The bank has kept the interest rate unchanged since April this year

BofA-Merrill Lynch further said imported inflation is expected to abate with the US Fed's tapering holding global commodity prices in check and stabilisation of the rupee.

In a report last week, BofA-ML said the US Federal Reserve's tightening will contain imported inflation by stabilising commodity prices.

"Fed tightening will itself likely contain 'imported' inflation by stabilizing commodity prices. Assuming normal rains, stable oil prices and a stable rupee, we expect CPI (consumer price index) inflation to come off to 6 percent levels by January 2016 in line with the RBI's targets," the report said.

It also said that high foreign exchange reserves hold key for rupee stability, more than the US versus India rate differentials.

"High import cover allowed for a sustainable appreciation of the rupee during August 2006 and April 2008 although the rate differential on average was a mere 180 basis points. Rising rate differentials, even at 805 basis points on average, could not prevent depreciation during July 2011 and September 2013 as the import cover halved to 7 months," the bank said.