Mumbai: RBI is likely to cut the cash reserve ratio by 0.25 percent in its bid to revive growth, but the continuing rupee volatility may prevent it from cutting short-term lending rate at its first quarter policy review, a Bank of America-Merrill Lynch report said today.
"We expect the RBI to cut CRR by 25 basis points (0.25 percent) to revive growth on July 30 even if the rupee volatility prevents it from cutting repo rate," it said.
It also said despite some public sector banks responding to finance minister P Chidambaram's call to cut base rate, tight liquidity remains a constraint.
Terming the country as a rare economy where policy rates are still at its 2008 peak, the report said cut in lending rates is key to growth recovery.
The report also noted that the economy is likely to see a shallow recovery despite better monsoons and possible lending rate cuts.
"We grow more confident of our view that the best we can expect is a shallow recovery on better rains and lending rate cuts (50-75 bps in FY14)," it said, adding, the global recovery is not likely to happen in the near-term.
The report also pointed out that though worst is over, there is simply no sign of recovery of the domestic economy yet.
"Our lead indicators...are now tracking the June quarter growth at 5 percent, marginally higher than 4.8 per cent in March on a better summer crops," it said, adding that growth will not bottom out until lending rates come off.
On the recovery in capex cycle, the report said capex cycle is not likely to revive till the global cycle turns in 2015.
First Published: Friday, July 5, 2013, 17:20