A day after the Reserve Bank held its rates unchanged, foreign brokerage Bank of America Merrill Lynch on Wednesday said it expects RBI will go for a 0.25% cut at the next review in February on inflation coming under control, lending rates being high and sagging growth.
It also hinted that fears over the impact of the seventh Pay Commission proposals are overdone, saying the monetary policy will not be "ham-strung" by it.
"We continue to expect RBI Governor Raghuram Rajan to cut a final 0.25% on February 2," it said in a note.
Among the factors which will drive the RBI for the cut will be achievement of the 6% inflation target in January, it said, adding that it expects the headline consumer price inflation to be at 5.5% in November.
In its policy statement, the RBI had said that inflation will rise till December and is expected to plateau after that.
BofAML said the 7.4% growth in September quarter (5.2% under the old series) is much below its expectation of achieving up to 7.5% growth for the fiscal 2015-16, which may prompt the central bank to give a boost through a rate cut.
Apart from this, it said the lending rates are expected to continue to be high, which is evident through the hardening of the benchmark yield, that may again result in some rate action.
On the impact of the implementation of the recommendations of the pay panel, it said it is "not really a risk".
"The government will likely have to target, say, 3.9% of GDP (as) fiscal deficit - higher than 3.5% last year - to fund the 0.7% of GDP outgo due to the 7th Pay Commission.
"To that extent, the RBI may be disappointed in its expectation of the MoF sticking to the pre-announced fiscal path that was probably set without taking the Pay Commission effect into consideration," it said.
Rajan had yesterday said that meeting the Pay Commission recommendations is difficult but not impossible while adhering to the fiscal roadmap.
He had asserted that the RBI's stance continues to be accomodatory and it will wait for getting more room to deliver more rate cuts.
