Bank of America Merill Lynch sees 0.25% rate cut to tide over note-ban impact on GDP

To reverse the impact of the demonetisation drive to growth prospects, the Reserve Bank of India (RBI) will cut rates on Wednesday as well as in the April policy review, foreign brokerage Bank of America Merill Lynch said on Tuesday.

"We continue to expect the RBI's monetary policy committee (MPC) to cut the rates by 0.25% on Wednesday and in April with demonetisation hurting growth," it said.

The brokerage said 60% of 2,000 respondents surveyed by it reported that they have been impacted by the note ban and attributed the "surprising" November industrial growth of 5.6% to lower base effect.

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The Economic Survey had pointed towards a 0.25-0.50% dent to growth prospects as a result of the note ban.

The expectation of inflation trending lower -- the note ban impacted demand leading to lower price rise -- was also cited as another important factor which will influence the MPC to cut rates, it said.

Other factors which will guide the RBI towards lowering the rates include Finance Minister Arun Jaitley cutting the fiscal deficit to 3.2% for next year and the dovish stance adopted by the US Fed.

It also wondered if the RBI will disclose the exact amount of scrapped currency notes received by it and estimated that the not-returned part to be around Rs 50,000 crore of the over Rs 15.55 trillion out in circulation on November 8, 2016.

On inflation, it said the RBI can scale down risks to the 5% March 2017 target from "upside" to "balanced" given the cooling in recent months and its estimate of the headline number coming in at 3.3% for January.

The brokerage also said it expects inflation to come down to 4.1% by March, which is 0.50% lower than the previous estimate of 4.6%.

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