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RBI can cut policy rates even if federal reserve hikes: BofA-ML

PTI 29 Aug 2014, 19:16:32 PM IST
New Delhi: The Reserve Bank of India (RBI) could cut policy rates by 75-100 basis points starting early 2015 even if the Federal Reserve hikes rates next year, Bank of America-Merrill Lynch has said in a report.
Monetary policies of the developed market and emerging markets, especially India, have turned “asynchronous” in recent years, the global financial services major said in its report.
“We believe that the RBI can continue to cut policy rates by 75-100 bps in 2015 from January to revive growth even if the Fed tapers off.”
The global brokerage firm believes that there are three main reasons why the RBI is likely to go for a rate cut even if the US central bank hikes them next year.
Firstly, the rate differential between India and the US is already very high and secondly, forex reserves are key to rupee stability. Thirdly a tightening by the Federal Reserve is exported to cool “imported” inflation by stabilising commodity prices.
The rate differential between India and the US that stands at 800 basis points is far higher than the average 460 basis points since January 2003.
Moreover, assuming normal rains, stable oil prices and a stable rupee, the country's CPI inflation is expected to come off to 6 per cent levels by January 2016 in line with RBI targets.
Soon after taking the reins of the Reserve Bank in September last year, Governor Raghuram Rajan surprised the industry by hiking the short-term policy rate by 0.25 per cent to keep inflation under check. The repo rate or the short term lending rate was increased to 7.5 per cent from 7.25 per cent.
Subsequently, the RBI raised repo rate by another 0.5 per cent to keep inflation under check. However, it has kept interest rate unchanged since April this year.
In the recent monetary policy review, RBI kept policy rate static at 8 per cent citing upside risks to inflation in view of uncertain monsoon and its impact on food production as also volatile international oil prices.