RBI may cut rate by 0.25% next month: BofA-ML

Says lending rate cuts, rather than reforms, hold the key to an immediate 'cyclical recovery' by end-2015 for the Indian economy

The Reserve Bank is likely to cut benchmark interest rate by 0.25 per cent in its next month's policy review if monsoon rains remain normal, Bank of America Merrill Lynch said today.

In its research report, the brokerage firm said lending rate cuts, rather than reforms, hold the key to an immediate "cyclical recovery" by end-2015 for the Indian economy.

"If rains are normal, we expect the RBI to cut 25 basis points on August 4," it added.

RBI, in its last policy review on June 2, had cut the repo rate by 0.25 per cent for the third time this year to spur investment and growth, but hinted that there may not be any more cuts in the near term.

"We continue to emphasise that lending rate cuts hold the key to a cyclical recovery in second half of 2015," Indranil Sengupta, chief economist India at Bank of America Merrill Lynch said in a research note.

Monsoon was above normal in June with 25 per cent excess rainfall despite a late arrival and a drought-like prediction.

BofA-ML said that a good June monsoon is no guarantee for a normal monsoon as it accounts for only 15.2 per cent of the seasonal rainfall.

The report further said that the impact of reform measures would be felt only after five years.

As regards May industrial output growth which slipped to 2.7 per cent, from 5.6 per cent a year ago, BofA-ML said the data is beginning to show some "turnaround". A slowing down of IIP, dragged down by manufacturing, would also make a case for a rate cut by the RBI.