RBI to maintain status quo on Aug 4; rate cut by March 2016: Morgan Stanley

However, expects the headline CPI inflation to decelerate to 4.9% by the end of next year

The Reserve Bank is likely to keep interest rates on hold in the next month's monetary policy meet, but may slash the key lending rate by a 50-75 basis points by March 2016, Morgan Stanley today said.

The investment firm believes that the RBI will leave the interest rates unchanged in its August 4 policy review meet given the acceleration in June headline CPI inflation and increase in core CPI for the third consecutive month.

"We believe the RBI is likely to wait and watch how the monsoon season pans out and keep rates on hold in the August monetary policy meeting," Morgan Stanley said.

The brokerage however expects the headline CPI inflation to decelerate to 4.9 per cent by the end of next year, which in turn "should create room for the RBI to lower rates by a further 50-75 basis points by March 2016", its report said.

The CPI inflation is likely to moderate due to weakening rural wages, slowdown in government spending, slower global commodity price growth and moderation in property prices, the global financial services major stated.

As per official figures, retail inflation rose to an eight-month high of 5.4 per cent in June on costlier food items, fuel, housing, clothing and footwear even as prices of sugar and confectionery items eased during the month.

The RBI, which tracks retail inflation as a benchmark for its monetary policy, said earlier last month that price rise was still a worry for the central bank. RBI expects inflation to rise to 6 per cent by January 2016.

The central bank is scheduled to announce third bi-monthly monetary policy on August 4.

On growth, Morgan Stanley said domestic demand would be the main driver of acceleration in growth, with support from external demand likely to pick up only gradually in the second half of this calender year.

According to the firm, slowing rural real wage growth and tightening fiscal policy are likely to hold back rural consumption in the next 3-6 months, while urban consumption is expected to accelerate in a sustained manner with rising real incomes, a steady pickup in job growth and added support from further rate cuts.

"We believe that in order to sustain growth at 7-8 per cent levels, in the medium term the government will need to focus on addressing issues related to land, labour tax, policy regime related to infrastructure and overall ease of doing business," the report added.