Monetary Policy: BofA Sees A 35 Bp Rate Cut

Bank of America Merrill Lynch economist Indranil Sen Gupta is betting the Reserve Bank of India will lower its benchmark interest rate by an unconventional 35 basis points on Thursday.

Known for his contrarian calls in the past, Gupta is taking guidance from Governor Shaktikanta Das’ comments in Washington in April that central banks could be more flexible in the size of rate adjustments, rather than sticking to the usual moves of 25 basis points at a time.

Gupta sees inflation reaching 3.3 per cent in May, which is well within the RBI’s target range of 2 per cent to 6 per cent, with economic growth likely remaining weak for the next two quarters.

Also read: RBI seen cutting repo rate by 25 bps

“Taken together with a more dovish Federal Reserve, US-China trade tensions, continued fiscal discipline by Prime Minister Narendra Modi’s government and tight liquidity conditions, there are plenty of reasons for policy makers to move by 35 basis points,” he said.

“Fading fiscal-rupee risks, after PM Modi’s re-election, should allow a cut greater than 25 basis points, in line with Governor Das’ out-of-the-box proposal,” Gupta, based in Mumbai, said in a BofA Merrill Lynch Global Research note.

Of the 34 economists surveyed by Bloomberg, 23 expect the RBI to cut its policy rate by 25 basis point to 5.75 per cent this week.

Kunal Kundu of Societe Generale SA is predicting a 50 basis-point reduction, Bank of America Merrill Lynch sees a 35-point move, and the rest are forecasting no change.