New Delhi: Lending rate cuts are key to economic growth recovery and banks should lower rates by 25 bps before the start of the busy season in October to accelerate reforms momentum, says a report.


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According to Bank of America Merrill Lynch (BofAML), investment continued to slip to 27.5 per cent of GDP, from 29.2 per cent in June 2016, with high lending rates dampening demand and sustaining excess capacity.


"On balance, banks should cut lending rates by 25 bps before the busy season sets in October. It is only after lending rates come down that demand will revive to exhaust capacity and spark investment," BofAML said in a research note.


It further noted that the Reserve Bank is expected to cut policy rates by 25 bps at its policy review meet on December 6 -- the one after the scheduled October meeting -- to signal a lower interest rate regime.


India's economic growth slipped to a three-year low of 5.7 per cent in April-June, underscoring the disruptions caused by uncertainty related to the GST rollout amid slowdown in manufacturing activities.


"June quarter GVA growth came in at a lower-than-expected 5.6 per cent in the new series and about 5 per cent in old series. This was driven by high lending rates, demonetisation shock and GST destocking," it said.


After lower-than-expected June quarter growth number, the possibility of a 25-basis point rate cut at the Reserve Bank's policy review meet on December 6 is more likely, the report added.


The RBI reduced the repo rate by 0.25 per cent to 6 per cent earlier in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.


"We cut our FY18 GVA growth forecast to 6.9 per cent from 7.2 per cent in the new series and 5.7 per cent from 6 per cent in the old series, well below our 7 per cent old GDP potential," it stated.