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Bank of America Merrill Lynch sees a possibility of 50-bps rate cut in October meet

BofAML said lower yields or lending rates hold key to growth bottoming out by early 2020.

ET Bureau|
Updated: Sep 14, 2019, 12.54 PM IST
Mumbai: Bank of America Merrill Lynch (BofAML) said there is a possibility of a 50-basis point cut in interest rates by the Reserve Bank of India in its upcoming monetary policy on October 4 following lower-than-expected August inflation data.

India’s retail inflation climbed to a 10-month high of 3.2 per cent in August but strayed below the central bank’s 4 per cent medium-term target, strengthening expectations of another rate cut next month. India’s industrial production growth slowed to 4.3 per cent in July, dragged mainly by manufacturing sector’s poor show.

“Our base has the RBI MPC following Governor Das into another ‘out-of-box’ 35-bps cut,” said BofAML in a note.

“We see the RBI MPC cutting to a 4.5 per cent RBI repo rate by September 2020, if global growth weakens,” the bank said.

BofAML said lower yields or lending rates hold key to growth bottoming out by early 2020. Liquidity crunch is still hurting growth with India Activity Indicator of BofAML pointing to weakness for another quarter.

The bank said that time for lending rate cuts is running out with the October-March ‘busy’ industrial season around the corner. Transmission should be faster with banks linking 50 per cent of their book to an external benchmark, it said. The bank plans to review its rate call after the September 18 meeting of the US Federal Open Market Committee.

“As real lending rates are higher, a more negative real policy rate is surely justified, in CPI terms, especially as CPI inflation averages 100 bps above wholesale price index...further RBI rate cuts are necessary to bring real lending rates down to our estimated 7 per cent potential (in old GDP series) to incentivise investments,” said BofAML.

RBI had cut repo rate by 35 bps to 5.4 per cent in its August policy review to revive the Indian economy. It was the fourth rate cut by RBI in a row. RBI had cut the policy rate by 75 basis points prior to the August policy review, through three rate cuts of 25 bps each in February, April and June.

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