Rate cuts, not reforms, key to immediate recovery: BofA-ML

Indian markets are “over-rating” the contribution of the pending GST and land acquisition reforms to the growth and its rate cuts by the Reserve Bank of India (RBI) which actually hold the key for an immediate recovery, Bank of America Merrill Lynch said on Tuesday.

In a research report, the global financial giant also said it is not very hopeful of these two reforms getting passed in the upcoming monsoon session of Parliament given the “political controversies”, while it expressed hope that RBI would cut its rate by 25 basis points (bps) in its August 4 review meet and by a further 25 bps by early 2016.

“In any case, we believe that lending rate cuts, rather than reforms, hold the key to an immediate cyclical recovery by say, end-2015. Reforms will support growth only over, say, five years and so, it does not really matter where they are legislated in this parliamentary session or next.

“We continue to think that the market is over rating the contribution of either legislation to growth,” the report said, while citing reply to a recent RTI query to state that just eight per cent of the projects stalled across India (66 of 804 stalled projects) were due to land acquisition issues.

“Similarly, GST will raise GDP (not growth) by one to two per cent over a few years,” it said.

According to BofA-ML, with inflation well on track to its under six per cent January 2016 target, a 50-basis point rate cut is likely.

“We expect the RBI to cut 50 basis points by early 2016 with inflation well on track to its ‘under-six per cent’ January 2016 target,” BofA-ML India economist Indranil Sen Gupta said in a research note.

On monsoon, the report said cumulative seasonal rainfall is running at normal levels, despite 13 per cent excess rains in June.

“If rains are normal, we expect the RBI to cut 25 basis points on August 4,” the research note added.

The brokerage asked investors to track six event risks — IIP, inflation, rains, Parliament, results, Fed — in July apart from the Greek drama.