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RBI to be Dovish on December 2, but Rate Cut in February: BofA-ML

The Reserve Bank of India (RBI) is likely to take a “more dovish” stance in its upcoming monetary policy review on December 2 and may go for a cut repo rate in February, according to a report by Bank of America-Merrill Lynch.

“While the December 2 policy should turn more dovish, RBI Governor Raghuram Rajan may want to await further clarity on the inflation peak-off,” the British brokerage house said in its report.

“We are increasingly confident about our call for a repo rate cut in February.”

The report sees the RBI achieving its inflation target of 8 per cent by January 2015 and 6 per cent by January 2016. Consumer Price Index-based inflation, or retail inflation, eased to 6.46 per cent in September – its lowest since January 2012 – from 7.73 per cent in August.

However, RBI Deputy Governor H R Khan had recently said that iinflation still has a “long way to go” and cautioned against early celebrations.

BofA-ML said that the case for lower rates looked increasingly compelling.

“September growth will likely slow to around 5 per cent from 5.7 per cent last quarter, buttressing our view that recovery will need lending rate cuts,” the report said.

It said that a case for rate cut also arises as imported inflation is moderating, with oil prices stabilising on Federal Reserve rate hike expectations and the rupee holding at 58-62 levels against dollar due to the RBI recouping foreign exchange reserves.

The report estimates CPI inflation to drop to 5.7 per cent in October from 6.5 per cent in September.

BofA-ML said economists expect the first rate hike by the US central bank in September against earlier expectations of June.

“It is another matter that we believe the RBI should be able to cut even if the Fed hikes, so long as it recoups foreign exchange reserves to stabilise rupee expectations,” it noted.

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