The Reserve Bank may cut key lending rate by 0.25 per cent later this week in view of benign inflation, said an SBI research report on Monday.
The six-member Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das will start its three-day meet in Mumbai on Tuesday and announce the policy on February 7.
"We now expect RBI to change its stance in February, but it is likely to remain on a pause mode. The first cut might happen in April 2019, but we believe it will be shallow rate cut cycle.
"However, we will not be overtly surprised if RBI delivers a 25bps rate cut on February 7 itself," said SBI's Ecowrap.
The central bank has maintained status quo on interest rate in its last three bi-monthly monetary polices after hiking the repo rate twice this fiscal by 25 basis points each.
There are indeed reasons to believe why RBI might just prefer to cut in February, the report said.
First, headline inflation still remains significantly benign and growth has hit a soft patch, it said.
"Sharp revisions in GDP growth in 2016-17 and 2017-18 imply a sub 7 per cent figure in 2018-19, clearly implying that we are currently in a slowdown mode. Also, inflation might have just bottomed out in December," it said.
Secondly, the credit growth has declined for the second fortnight in January, implying that incremental credit growth data available till December is showing significant decline (which might have continued in January).
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This is not encouraging and is evident for services, despite improvement in credit to NBFCs in December.
"However, most encouraging is credit to MSE sector, which has seen good growth in December due to the government recently launching an MSME outreach programme," Ecowrap said.
Non-banking financial companies' primary issuance of corporate bonds for the three months to December has declined by Rs 25,168 crore.
This rapid decline may have shifted to banks' credit portfolio. Bank credit to industry has jumped by Rs 47,700 crore during the same period, it added.