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Merrill Lynch expects 0.25% rate cut by RBI on Jan 29

The RBI has not lowered the key policy rate (repo rate) since April 2012 on concerns of inflation.

New Delhi: With RBI's monetary policy review on Tuesday keenly awaited, a report of Bank of America Merrill Lynch expects the central bank to reduce its key interest rate by 0.25 percent.

"Whats on everyone's mind? RBI's Tuesday policy, in which we expect a 25 bp policy rate cut," the report said on Monday.

The RBI has not lowered the key policy rate (repo rate) since April 2012 on concerns of inflation. Last April, it had lowered the rate by half a percentage point, its first after hiking the policy rate 13 times.

"Looking ahead, we expect the RBI to cut by 75 bp by June, pause in 2H13 as inflation crosses 7.5 percent on diesel price and power tariff hikes and cut 50 bp again in March 2014 quarter as inflation subsides," it added.

According to the American investment banking major, most of the investors are in "show me mode". They want to see rate cuts and Cabinet Committee on Investment speeding up project clearances, among other things.

Exporters body FIEO too is seeking a cut in the key policy rate.

"With inflation ebbing to levels of a 36 month low, anticipating a rate cut is only natural and a combination of repo and CRR cut of a quarter percentage point each may yield some results in terms of lowering interest rates by banks," FIEO President M Rafeeque Ahmed said.

Industry body ASSOCHAM has made a demand for a "big rate cut" of at least 100 basis points.

"It is time, the RBI went in for a bold move and slashed the repo rate by at least 100 basis points. Only then the prolonged high interest rate cycle will be broken and the growth would get some breathing space for revival," the chamber said in a statement.

Inflation based on wholesale prices declined to a three- year low of 7.18 percent in December. However, retail inflation rose for the third successive month in December to 10.56 percent.

Industrial output contracted by 0.1 percent in November. The economy grew by 5.4 percent in April-September this fiscal, as against 7.3 percent in the same period of 2011-12. It is estimated that the year-end GDP would be 5.7 percent, a 10-year low.