BofA-ML sees 0.25 per cent rate cut by RBI in Feb policy review

Bank of America Merrill Lynch (BofA-ML), the foreign brokerage, on Friday said a 'dovish' Reserve Bank of India (RBI) will slash key interest rates by 0.25 per cent at the February monetary policy review meet and will do cuts of 0.75 per cent in 2015.

"The RBI policy stance is much more dovish...we grow more confident of our call of a February RBI repo rate cut," it said in a note in Mumbai, adding there will be a 0.25 per cent cut at the February policy review, while the softer oil prices will ensure a 0.75 per cent cut through 2015.

At the central bank's fifth bi-monthly monetary policy review earlier this week, RBI Governor Raghuram Rajan chose to hold rates, saying it was premature to go in for a cut, but he painted an optimistic picture, saying inflation was coming under control.

However, he hinted of a cut in early 2015, once RBI sees conclusive evidence of change in inflation trajectory.

The sharp slide in global oil prices, which had a positive impact on inflation, will help the central bank meet its 6 per cent consumer price (or CPI) inflation target of January 2016, BofA-ML said, adding the price rate would further slip to 4.2 per cent for November, down from 5.52 per cent in October.

The correction in oil prices will also help the government finances, the global financial services major said, adding the fiscal deficit will narrow by 0.20 per cent in FY16. The Centre's oil subsidy bill will fall by Rs 23,400 crore to Rs 40,000 crore in FY16.

Brent crude prices have dropped to five-year lows due to supply glut and a shift towards shale gas.

On the domestic currency, the note said RBI will hold the rupee in the 58-62 band against the US dollar on the back of a relative comfort on the current account deficit (CAD) as a result of the slide in oil prices.

BofA-ML said it expects the CAD to come in at 1.4 per cent of gross domestic product (GDP) for FY15 and inch up to 1.6 per cent in the next financial year (2015-16).

The high CAD - 4.7 per cent in FY13 which came down to 1.7 per cent in FY14 through unconventional measures - was a key reason for the sharp drop in the rupee value against dollar in August 2013.