RBI likely to go for 25 bps rate cut on August 9: BofA-ML

A further easing of 25 bps is likely as consumer price index inflation came in at a below-expected 4.8% for March

The Reserve Bank of India (RBI) is likely to cut key rates by 25 basis points in its policy review meeting on August 9, largely owing to benign inflation, low Index of industrial production (IIP) growth and good monsoon forecast, a report says.

According to the global financial services major Bank of America Merrill Lynch (BofA-ML), a further easing of 25 bps is likely as consumer price index (CPI) inflation came in at a below-expected 4.8% for March, and February IIP grew an anaemic 2%.

"We have grown more confident of our call for the RBI to cut policy rates 25 bps on August 9," it said in a research note.

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Earlier this month, RBI reduced its policy rate by 0.25% to 6.5% — its lowest level in more than five years. While this was the first rate cut after a gap of six months, RBI has lowered its rate by 1.5% cumulatively since January 2015.

However, the industry still wants further rate cuts from RBI to boost investment.

According to the global brokerage firm, CPI should average around 5% in this financial year barring extraordinaries like a notional hike in housing price inflation due to the 7th Pay Commission or an arithmetical rise in inflation due to oil price hikes from a low base.

Meanwhile, after three months of contraction, February industrial growth printed an anaemic 2 per cent and is yet to show any sustainable recovery.

"We continue to expect the RBI to cut policy rates again on August 9 after March inflation came in at a benign 4.8% today," BofA-ML said, adding that "we expect inflation to average 5% in FY17".

The RBI, on April 5, cut the key interest rate by 0.25% and introduced a host of measures to smoothen liquidity supply so that banks can lend to the productive sectors and indicated an accommodative stance going ahead.