The Reserve Bank of India (RBI) is approaching the end of its rate-cutting cycle and is expected to go for a final 25-basis points (bps) repo rate cut at its policy review meet on February 2.
According to the global financial services major, a rate reduction is likely as inflation may be in line with RBI's January 2016 under-6% target.
"We continue to expect a final 25 bps RBI repo rate cut on February 2. That said, RBI is approaching the end of its rate-cutting cycle," Bank of America Merrill Lynch (BofA-ML) said in a research note.
BofA-ML sees "compelling reasons" for a rate cut on Tuesday. First, inflation print could be in the comfort zone of RBI in the near term. Second, growth remains weak and a rate cut would provide an additional impetus to the fledgling recovery.
BofA-ML's assessment is policy easing should back up the rupee as well by attracting inflows. The other supporting factor, it argued, is fiscal deficit, which is "well under control".
On inflation outlook, BofA-ML said consumer price index (CPI) is likely to bounce back to around 5-6% in 2016-17.
The global brokerage firm noted that RBI achieving 5% 2016-17 target will depend on how weather phenomenon El Niño plays out, the Seventh Pay Commission impact and oil price movements.
BofA-ML's lead indicators are projecting 5% gross domestic product (GDP) for the December quarter according to the old series. In the new GDP series, "we are tracking 7-7.5%, without any improvement over September's 7.4%," the report added.
"Even if Arun Jaitley retains the 2016-17 fiscal deficit at 3.9% of GDP, like FY16, instead of cutting it to the pre-committed 3.5%, it will be well below the 4.8% average since 2000," the report added.