The Reserve Bank of India is expected to go in for 25 bps rate cut at its next monetary policy meet on February 8 - as also in April - says a Bank of America Merrill Lynch (BofA-ML) report.
According to the global financial services major, further easing is likely as demonetisation is hurting growth while inflationary pressure is benign and the government is expected to target a conservative fiscal deficit of 3.5 per cent of GDP.
"We grow more confident of our call of a 25 bps RBI rate cut on February 8 (and April) after release of latest CPI/WPI/IIP data," BofA-ML said in a research note.
Incoming data show that demonetisation is impeding growth, BofA-ML said, adding that "old series GDP growth is already languishing at 4-4.5 per cent".
BofA-ML has slashed its March inflation forecast to 4.6per cent (from 5.1 per cent), which is well below RBI's 5 percent target and noted that an RBI rate cut will support the rupee by attracting foreign capital flows.
"We continue to expect CPI inflation to meet RBI's 5 percent March 2017 target. In fact, we have cut our March 2017forecast to 4.6 per cent from 5.1 per cent," it added. Retail inflation eased further to nearly 3-year low of3.41 per cent in December, reflecting weak demand as consumers grappled with cash crunch following demonetisation.
Rising prices of petrol and diesel fuelled WPI inflation to 3.39 per cent in December 2016. On December 7, the central bank kept interest rate unchanged despite calls for lowering it and lowered the economic growth projection by half a percentage point to 7.1per cent in the first policy review post demonetisation.
The central bank will hold its next monetary policy meet on February 8.