The Reserve Bank of India is likely to go for a 0.25% cut in cash reserve ratio (CRR) instead of interest rates next week as this move is likely to balance growth and rupee concerns, Bank of America Merrill Lynch said on Thursday.
The foreign brokerage firm had earlier said that the Reserve Bank would go for a 0.25% cut each in repo, or short-term lending, rate and CRR - the mandatory portion of cash banks have to park with the RBI - in its upcoming mid-quarter policy review on June 17.
"We have replaced our 25 bps (basis points) RBI rate cut call, on Monday, with a 25 bps (0.25%) CRR cut," BoA ML said in a research note, adding that "we retain our 25 bps (0.25%) RBI rate cut on July 30".
In the last policy announcement on May 3, the central bank had cut its key rate of lending - the repo rate - by 0.25%.
According to the research note, CRR cut is likely to transmit RBI rate cuts to lending rates. Lending rates in India are still ruling at their 2008 peak.
"We continue to expect the RBI's CRR cuts/OMO to push up deposit growth to 14-15% levels from the current 13%. High lending rates have expectedly pulled down loan demand to 14% levels already. This, in turn, should pull down lending rates by 25-50 bps (0.25-0.50%) by September," BoA-ML said.
On the rupee front, the report said the RBI will now try to hold 54-58 per dollar, up from 52-56/$, assuming the US dollar stabilises at 1.30-1.20/€.
Moreover, the RBI is likely continue to try to defend Rs 58/$ levels as a weak rupee will raise risks of losing investor confidence and inflation, the report said. The RBI has to recoup forex reserves to stabilise the rupee as India's forex reserves are trailing behind BRIC levels.
Forex reserves as a percentage of GDP at present stands at 15.8 for India, while for Brazil it was 16.8, Russia 27.6 and for China it stood as high as 39.9.
The rupee on Thursday fell by 43 paise to 58.22 against the dollar in early trade.