RBI to pause on Tuesday; cut 25 bps in Feb: BofA-ML

RBI governor on Sep 29 effected a more-than-expected interest rate cut of half a percent to spur the economy

The Reserve Bank is likely to hit the pause button in its policy review meeting on Tuesday, but a 25 basis point cut is likely in February, says a Bank of America Merrill Lynch report.

According to the global financial services major, after the 25 basis points cut likely in February there is little headroom to cut rates, but the Central Bank will continue with its "accommodative" stance.

"We expect Reserve Bank of India governor Raghuram Rajan to pause on Tuesday, given the 50 basis points cut last time. He should cut a final 25 basis points in February," BofA-ML said in a research note.

Rajan on September 29 effected a more-than-expected interest rate cut of half a percent to spur the economy.

Consumer Price Index or retail inflation is set to meet the under-6% market in January, BofA-ML said, adding that though it will likely rise to 5.5-6% in the March quarter on base effects, the "RBI should look through that", it added.

Retail inflation stood at 5% in October, while the one based on the Wholesale Price Index (WPI) contracted to 3.8% during the month.

Although poor winter rains pose another threat, BofA-ML said it expects the Centre to use supply side measures rather than monetary policy to fight El Nino.

Regarding the 135% jump in house rent allowance for civil servants by the 7th Pay Commission, the report said that the markets and the RBI should look through the impact of the increase in imputed value of rentals of government quarters as it is purely notional.

The report noted that "the government will likely have to target, 3.9% of GDP fiscal deficit - higher than 3.5% last year - to fund the 0.7% of GDP outgo due to the 7th Pay Commission".