There is room for a 50 basis point (bps) rate cut by the Reserve Bank of India (RBI) over the next few months with 25 bps each likely in February and April, says Bank of America Merrill Lynch (BofA-ML).
The RBI is expected to pause on the December 7 monetary policy review that rate cut would be a "bullet wasted".
According to the global financial services major, the "dovish" RBI monetary policy committee (MPC) minutes released last week signal towards a more accommodative policy stance in the coming months.
It listed "five compelling reasons" for 50 bps cut. First, growth is weak; second, inflation will likely slip; third, an early 2017 50 bps RBI rate cut should send a signal to banks to cut lending rates; fourth, the rate cut should support the rupee by attracting foreign portfolio investors inflows and finally, the bankruptcy code and goods and services tax legislation should convince the RBI MPC of the government's pursuit of reforms.
The report further said that though the RBI is expected to cut 25 bps on February 7 and April, it is not likely to go too much below the current levels "given that 6.5-7 per cent medium-term CPI (consumer price index) inflation is surely a good proxy for inflation expectations".
The MPC, which has three members nominated by the government and the rest from RBI, lowered repo rate to 6.25 per cent from 6.50 per cent at the end of two-day deliberations on October 4. The next meeting of the MPC is scheduled on December 6 and 7.
Retail inflation based on CPI in September dropped to 13-month low of 4.31 per cent, mainly on account of easing vegetables prices, creating headroom for further rate cut by the RBI in coming months.