New Delhi: The Reserve Bank is expected to hold the key rate at its monetary policy review next month but may opt for a 0.25 percent cut in August, says a Bank of America Merrill Lynch (BofAML) report.
The global brokerage cited three reasons for the central bank to cut rates in August. First, the growth remains weak, second, inflation remains within RBI's 2-6 percent range and a rate cut would help RBI to recoup forex reserves.
"As it has just hardened its stance, the RBI will likely wait for transfer of the 'special' dividend to the fiscal from demonetisation and good rains before cutting in August," BofAML said in a research note.
It noted that GDP growth based on old series is running at 4.5-5 percent, well below its estimated 7 percent potential.
Inflation, it said, would average 4 percent in the first half of 2017.
A rate cut, it added, would help attract foreign portfolio investors (FPI) in equity flows by supporting growth.
"We continue to expect RBI monetary policy committee to pause on June 6 and cut rates by 25 bps in August," it said.
The Reserve Bank in its monetary policy review meet on April 6 kept the repurchase or repo rate -- at which it lends to banks -- unchanged at 6.25 percent but increased reverse repo rate to 6 percent from 5.75 percent.
On rupee, the report said that although the domestic currency has strengthened to 64/USD level, going forward seasonality will turn against it and it might depreciate to some extent.
"While INR has strengthened to Rs 64/USD, seasonality will turn against it in coming weeks. Our Asia forex strategists see Rs 66.75/USD by December," it noted.