RBI Monetary Policy: Here's why RBI may execute a surprise rate cut, says BoFA-ML

Outgoing Reserve Bank Governor Raghuram Rajan’s is expected hold key rates at his last monetary policy today before his three-year term comes to an end.

A CNBC-TV18 poll of economists says 95 percent expect repo rate to remain unchanged, while 5 percent expect a 25 basis point rate cut.

Indranil Sengupta, Chief Economist - India, BoFA-ML, is among the 5 percent who expect the central bank to cut key interest rates."There are strong fundamental reasons for a rate cut," he told CNBC-TV18, adding that he expects inflation to come down to RBI's 5 percent March target on back of good monsoons. He maintained that growth is weak and that reflects in poor loan demand. "An RBI cut will help bank cut lending rates," he said, adding that if the RBI cuts now before the busy season, it would allow banks to pass on the cut.If not a rate cut, Sengupta said RBI would reiterate its commitment to provide enough liquidity and there could be some measures for bank capitalisation.In the CNBC-TV18 poll question on liquidity, 60 percent said they expect RBI to keep it at the current excess, 20 percent said it would lower it to balance while 10 percent said the central bank would keep it at a slight deficit.

But Taimur Baig of Deutsche Bank AG goes with the consensus view: "If there was no major reason for RBI to cut in the previous policy, there would be no reason to cut now," he said.Baig says today's meeting may be about the larger picture -- and not subjects like interest rates and inflation -- and said Rajan may talk about the importance of maintaining institutional integrity, etc.