The Reserve Bank of India (RBI) may cut key policy rates by 0.25 per cent either at the upcoming policy review in February or the one after that in April, Bank of America Merrill Lynch has said.
For the second time in a row, the central bank had maintained status quo on all key policy rates in the fifth bi-monthly monetary policy review announced on Wednesday. It had raised the repo rate, or the rate at which the RBI lends short-term money to the banks, twice by 0.25 per cent during its June and August policy reviews.
“We expect the RBI MPC (monetary policy committee) to roll back at least 0.25 per cent of the 0.50 per cent rate hike, in February or April,” the American brokerage said in a statement today.
It said although RBI retained the “calibrated tightening” stance, Governor Urjit Patel said there is room for opening up of commensurate policy action if risks to their inflation forecast do not materialise. It can be noted that the RBI lowered its second-half inflation estimate to 2.7-3.2 per cent from the earlier 3.9-4.5 per cent.
“If the upside risks we have flagged do not materialise or are muted in their impact as reflected in the incoming data, there is a possibility of space opening up for commensurate policy action,” Patel had said on Wednesday, hinting at a rate hike.
The risks include food prices, impact of minimum support prices hike on inflation, crude prices and global financial markets.
The brokerage said that the monetary policy committee’s inflation risks are “proving overdone” and the headline price rise number is expected to slip to 2.8 per cent due to lower inflation on the agricultural front.
The headline inflation will come in at 3.7 per cent for December and the second-half average will be 3.5 per cent, which is lower than the 4 per cent medium term target for RBI, the brokerage said, pointing it as a key factor to decide whether the rate cut happens in February or April.
The brokerage said it expects RBI to step up liquidity injection through its open market operations to Rs 50,000 crore a month during the March quarter.