The Governor Raghuram Rajan-led Reserve Bank of India (RBI) is likely to hold the key interest rate in its policy review meeting later this month and is expected to lower that from February, says a Bank of America Merrill Lynch (BofA-ML) report.
According to the global financial services major, the Consumer Price Index based inflation is peaking off and is expected to be around 7.5-8 per cent in September.
"We expect the RBI to begin to cut rates starting February with stable oil prices and INR providing comfort that CPI inflation will come off to 6 per cent by early 2016," BofA-ML said in a research note.
The Wholesale Price Index based inflation fell to 5-month low of 5.19 per cent in July on account of decline in vegetable prices, while the CPI-based retail rose marginally to 7.96 per cent in July, from 7.46 per cent in June.
The BofA-ML report further noted that late rains should water a good winter rabi crop to douse agri-inflation. Moreover rising investment is beginning to step up agriculture, especially horticulture production.
Secondly, 'imported' inflation is expected to abate with the US Fed's tapering holding global commodity prices in check and stabilisation of the rupee.
Indian diesel prices will get benchmarked to global prices by June and finally, weak aggregate demand will likely check pricing power.
On GDP, the report said that the growth rate is bottoming out. It is, however, expected to return to 7.5 per cent not before 2018.
Soon after taking the reins of RBI in September last year, 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, 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.