RBI running out of time to cut repo rate: BofA ML

Moneycontrol Bureau

With the Reserve Bank Governor Raghuram Rajan maintaining status quo in its recent monetary policy, foreign brokerage house Bank of America Merrill Lynch believes the central bank is running out of time to cut lending rates.

Governor Rajan on Tuesday maintained status quo on the key policy rates, citing non-transmission of rates from banks to consumers as a critical reason. The policy repo rate was left unchanged at 7.25 percent and the cash reserve ratio (CRR), too unchanged, at 4 percent.

A report by the brokerage states: "Time is running out for further lending rate cuts this fiscal with the April-October busy industrial season barely two months away. "

While the RBI has made lending rate cuts a pre-condition for further repo rate cuts, the brokerage is of the view that loan growth has come down from 21 percent to 10 percent due to tight reserve money.

"With capital flows drying up, it is difficult for the RBI to pump in sufficient reserve money to soften lending rates before the busy season begins in October," the report adds.

An easing in consumer price inflation (CPI), pegged at  4 percent in July vis a vis 5.45 in June,  and a marginal uptick in industrial growth, pegged at 3.5 percent, both make a strong case for a rate cut in September, says the brokerage. The macro data will be announced next week.

BofAML believes these two macro numbers, apart from monsoons, Q1 earnings, Iran oil payments and Reserve Bank's bond sale, are the six events that will set the tone for the upcoming week. (Written by Ritika Dange)