'RBI may slash policy rate by 0.25% on Feb 2'

Towards the end of financial year 2015-16, the Reserve Bank of India is approaching the end of its rate-cutting cycle and is expected to slash the repo rate by 0.25 percent on Feb 2

New Delhi: The Reserve Bank of India is approaching the end of its rate-cutting cycle and is expected to go for a final 25-bps repo rate cut at its policy review
meet on February 2.

According to the global financial services major, a rate reduction is likely as inflation may be in line with RBI's January 2016 under-6 per cent target.

"We continue to expect a final 25 bps RBI repo rate cut on February 2. That said, RBI is approaching the end of its rate-cutting cycle," Bank of America Merrill Lynch said in a research note.

BofA-ML sees "compelling reasons" for a rate cut on Tuesday. First, inflation print could be in the comfort zone of RBI in the near term.

Second, growth remains weak and a rate cut would provide an additional impetus to the fledgling recovery. BofA-ML's assessment is policy easing should back up the rupee as well by attracting inflows.

The other supporting factor, it argued, is fiscal deficit, which is "well under control". On inflation outlook, BofA-ML said CPI is likely to bounce back to around 5-6 per cent in 2016-17.

The global brokerage firm noted that RBI achieving 5 percent 2016-17 target will depend on how weather phenomenon El Nino plays out, the 7th Pay Commission impact and oil price movements.

BofA-ML's lead indicators are projecting 5 percent GDP for the December quarter as per the old series. In the new GDP series, "we are tracking 7-7.5 per cent, without any improvement over September's 7.4 per cent", the report added.

"Even if Arun Jaitley retains the 2016-17 fiscal deficit at 3.9 per cent of GDP, like FY16, instead of cutting it to the pre-committed 3.5 percent, it will be well below the 4.8 percent average since 2000," the report added.