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The Reserve Bank is likely to cut rates by 0.25% in February's monetary policy review as its target of 6% inflation by January 2016 is likely to be met, Bank of America Merrill Lynch has said.
"In our view, inflation is well set to achieve RBI's 8% January 2015 and 6% January 2016 CPI inflation targets. We continue to expect Governor Raghuram Rajan to cut rates by 25 basis points on February 3," the investment banking major said in a note.
Expecting January Consumer Price Index (CPI) based inflation at 6.2%, it said there will be a greater visibility of close-to-normal winter wheat crop, adding that sowing is picking up after a delayed start due to late rains.
On rupee, it said RBI may continue to be defensive at a level of Rs 62-63 per USD.
"We continue to expect the RBI to continue to mount a token defence at Rs 62-63 per $levels, selling $500 million-1 billion, as it is doing. It is only at Rs 65 per $that we see full-scale forex intervention of $15 billion.
"The RBI should ideally want to hold Rajan's preferred Rs 60-62/$ zone. At the same time, it will not spend too much of precious forex at a time the INR has outperformed most BRICS currencies," it added.
