RBI to cut key rates by 0.25% in June: BofA-Merill Lynch

Foreign brokerage Bank of America Merill Lynch (BofA-ML) today said the Reserve Bank will go for a 0.25 per cent cut each in repo rate and cash reserve ratio (CRR) in its upcoming mid-quarter policy review on June 17.

In the last policy announcement on May 3, the central bank had cut its key rate of lending--the repo rate--the rate at which it lends short-term money to banks-- by 0.25 per cent.

But bankers said they cannot cut lending rates as the liquidity pressures keep the cost of funds high.

"It could cut CRR by 0.25 per cent on June 17 alongside a 0.25 per cent repo rate cut," it said in a note.

BofA-ML said the liquidity deficit is running higher than the forecasts because the RBI has suspended its bond buybacks or open market operations.

"We think that the RBI cannot afford to wait much longer as the primary liquidity injected today will drive deposit growth six months later," it said.

The Reserve Bank has been loosening its elevated rates as inflation, which came to under 5 per cent for April, has been cooling. However, bankers repeatedly complain of the elevated cost of funds, caused by factors including slower deposit growth, for holding to high rates.

BofA-ML said it expects the rupee, which has been depreciating over the past weeks, to bounce back and be at 52.50 to the dollar by the end of June. The current weakness against the American currency is partly seasonal and partly driven by the dollar strength, it said.

The note added that RBI's reserves of over $292 billion are sufficient to defend the 56 level, and contain imported inflation by doing so.