RBI to cut rates in June, July after April WPI: BofA-ML

Bank of America-Merrill Lynch expects the Reserve Bank of India to cut interest rates by 25 basis points on June 17, and then by another 25 bps in July - revising its prior expectation of a cut in October - according to a note on Wednesday.

The investment bank cites lower-than-expected wholesale price inflation data on Tuesday as the reason behind its expectations of early rate cuts.

"We have added a second 25 bps RBI rate cut on July 30 after the one on June 17 to revive growth after April WPI inflation dropped to 4.9 percent," economists at the bank wrote in a note.

The investment bank expects the RBI to pause after July to see whether inflation accelerates in the second half of 2013 due to planned hikes in state-set prices of diesel, electricity and coal.

BofA-ML also expects the RBI to buy a total of 1.6 trillion rupees of bonds through open market purchases in fiscal 2014 to improve liquidity, and to cut the cash reserve ratio by 50 bps in the second half of 2013.

The bank also expects the RBI to hold the rupee in a 52 to 56 range if the euro continues to trade in a USD 1.2 to USD 1.3 band.

"It will likely buy FX at 52 per dollar levels with import cover halving to seven months in the past four years," BofA-Merrill said, estimating the central bank bought USD 1 billion from the market in April.

The bank also expects the central bank to defend the rupee at 56 levels.