RBI may go for 25 bps repo rate cut next week: Deutsche Bank

Says in order to induce banks to lower lending rates further, RBI has to resort to further easing

The Reserve Bank of India (RBI) is likely to go for a 25 basis point cut in interest rate in its monetary policy review meet next week amid muted inflation, a "prudent Budget" and concerns about the impact of demonetisation on growth, says a Deutsche Bank report.

According to the global financial services major, there is room for an accommodative policy stance by RBI next week, although the scope for further rate cuts is unlikely given global price developments.

"We are still calling for a 25 bps repo rate cut next week," Deutsche Bank said in a research note but added that "our confidence in a series of further cuts has been dented somewhat given global price developments".

It said that RBI is expected to use a mix of both tolerating more nominal rupee depreciation and resorting to further monetary easing – either through outright repo rate cuts or by allowing more liquidity in the money market – to provide support to growth in the coming months and quarters.

Moreover, in order to induce banks to lower lending rates further, the central bank has to resort to further easing.

"Some more reduction in lending rates may be required to support growth in our view, for which the RBI should consider easing the policy rate next week, given that monetary transmission takes place in India with a significant lag," Deutsche Bank said.

On December 7, the central bank kept interest rate unchanged despite calls for lowering it and also lowered the economic growth projection by half a percentage point to 7.1 per cent in the first policy review post demonetisation.

The central bank will hold its next monetary policy meet on February 8.