Mumbai: The Reserve Bank of India is likely to cut the repo rate by 25 basis points in the August policy as growth is likely to remain weak and inflation to be softer this year, brokerage Bank of America Merrill Lynch (BofA-ML) has said in a report.
"Recovery remains shallow with old GDP growth, at 4.9 per cent in FY2016 and 5.8 per cent in FY2017, well below our 7-7.5 per cent potential. Secondly, inflation, at 5-6 per cent, remains benign, especially with a good monsoon likely to douse agflation and oil prices likely to slip to $39 a barrel by September," BofA-ML said in its report.
It can be noted that citing rising inflationary pressure, the RBI had left key policy rates unchanged at Tuesday's policy review, but sounded accommodative provided the April reading of CPI (Consumer Price Index) inflation was an aberration.
The RBI's next monetary policy review is due on August 9.
The Wall Street brokerage expects CPI inflation for May at 5.7 per cent, which will be out on June 13.
The report said that an RBI rate cut will signal lending rate cuts if the RBI's open market operations push money markets into seasonal surplus by June.
"This should lead to lending rate cuts of 50 bps by September before the busy industrial season commences," it said.
The report estimates that the RBI will need to inject $49 billion or Rs 3,30,000 crore of durable liquidity in the current fiscal year.
As a result, the loan market will likely see potential excess supply of 17.1 per cent for the first time since 2013, the report said.
For the FCNR-B deposits, which start maturing in September, the RBI will sell foreign exchange reserves to fund FCNR maturity outflows, the report said, adding if the Fed hike stalls flows, the report expects the RBI to roll over, it added.
"Recovery remains shallow with old GDP growth, at 4.9 per cent in FY2016 and 5.8 per cent in FY2017, well below our 7-7.5 per cent potential. Secondly, inflation, at 5-6 per cent, remains benign, especially with a good monsoon likely to douse agflation and oil prices likely to slip to $39 a barrel by September," BofA-ML said in its report.
It can be noted that citing rising inflationary pressure, the RBI had left key policy rates unchanged at Tuesday's policy review, but sounded accommodative provided the April reading of CPI (Consumer Price Index) inflation was an aberration.
The RBI's next monetary policy review is due on August 9.
The Wall Street brokerage expects CPI inflation for May at 5.7 per cent, which will be out on June 13.
The report said that an RBI rate cut will signal lending rate cuts if the RBI's open market operations push money markets into seasonal surplus by June.
"This should lead to lending rate cuts of 50 bps by September before the busy industrial season commences," it said.
The report estimates that the RBI will need to inject $49 billion or Rs 3,30,000 crore of durable liquidity in the current fiscal year.
As a result, the loan market will likely see potential excess supply of 17.1 per cent for the first time since 2013, the report said.
For the FCNR-B deposits, which start maturing in September, the RBI will sell foreign exchange reserves to fund FCNR maturity outflows, the report said, adding if the Fed hike stalls flows, the report expects the RBI to roll over, it added.
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