RBI may cut rates by 25 bps in next policy review: BofA-ML

The Reserve Bank is likely to cut interest rates by 25 bps in its June 2 policy review as the CPI inflation expected to stay below the 6 percent target set by the central bank, says a Bank of America Merrill Lynch (BofA-ML) report.

The retail inflation as measured by Consumer Price Index stood at a 3-month low of 5.17 percent in March and at 5.37 percent in February this year. The RBI has targeted CPI-based inflation to be at six percent by January next year.

According to the research report, after the June rate cut, the RBI is likely to hold on to the "pause" button for sometime and go for a further 50 basis points cut in early 2016.

"We grow more confident of our call that the RBI Governor will cut rates 25 basis points on June 2 with CPI inflation well set on the below-6 percent January target," BofA-ML said adding "the RBI will likely pause thereafter to see the expected September Fed rate hike through."

The global brokerage firm said that the 'pre-conditions' set by the RBI for a rate-cut are largely met; moreover, food prices are yet to react to unseasonal rains. "Daily food price data shows that food prices are yet to react to unseasonal rains," BofA-ML said adding that "while there could still be some upside risks to food inflation, they are unlikely to sustain as the new harvest should come in the next few weeks".

The global brokerage firm has pencilled in a further 50 bps cut in early 2016 after markets price in Fed tightening.

According to BofA-ML, the chance of a hike in interest rates by the Fed in June is very low and the Fed is expected to hike rates in September.

"Our US economists remain comfortable with our long held call for a September liftoff after Monday's FOMC meeting. They think that the chance of a June hike is very low," the report said.

The central bank has lowered its policy rate twice so far in 2015, but maintained a status quo in its last monetary policy review on April 7 on fears of unseasonal rains impacting food prices.

The next review meeting is scheduled on June 2, although the previous two cuts have taken place outside the scheduled policy reviews.