A lower quantitative easing by the US Federal Reserve is likely to help India as it will enable the RBI to pull down rates by curtailing "imported" inflation, Bank of America Merrill Lynch said in a report.
The minutes of the Fed's December meeting, however, revealed some "worries" about continued quantitative easing.
About half of its officials expressed the view that quantitative easing could be scaled back or stopped during 2013, if the economy improves and unemployment figure drops.
The Federal Open Market Committee (FOMC) voters in 2013 are likely to be more dovish than in 2012 and accordingly BofA Merrill Lynch expect the Fed to put in around USD 85 billion a month through 2013.
"We believe that reduced Fed easing would contain global commodity price inflation, reduce 'imported' inflation and enable the RBI to ease lending rates to support growth," BofA Merrill Lynch India Economist Indranil Sen Gupta said in the research note.
Moreover lower-to-stable oil prices would help narrow twin deficits and the reduced macro risks are likely to sustain capital inflows even if global liquidity reduces due to lower quantitative easing, BofA Merrill Lynch said.
On RBI's tight monetary policy, the report said, the tightening has increasingly turned counterproductive in hurting growth rather than denting inflation, which is largely
driven by high global liquidity rather than domestic demand.
Reserve Bank has resisted a widespread call for the growth-propping rate cuts for some time now, citing the elevated inflation.
In the mid-quarter monetary policy review on December 18, RBI kept key interest rates unchanged.
It left the short-term lending (repo) rate and the cash reserve ratio - the amount of deposits banks have to park with RBI - unchanged at 8 per cent and 4.25 per cent, respectively.
According to BofA Merrill Lynch, India's inflation will not normalise to, say, 6-6.5 per cent levels till the G-3 central banks shift to a tighter monetary policy stance.
The Indian rupee is likely to remain weak for the next two-three years as the current account deficit is likely to remain high till 2015.
On Rupee BofA ML said "we do not expect the current account deficit to narrow to our estimated sustainable 2.5 per cent of GDP till 2015 when US economists expect growth to revive sufficiently for the Fed to start to hike rates."
Accordingly, the rupee is likely to rule structurally weak for the next 2-3 years, the report said.