We expect RBI to cut interest rates by 0.25% on April 5: BofA-ML

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The Reserve Bank of India (RBI) is expected to cut key interest rates by 25 basis points (0.25%) at its policy review meet on April 5, a Bank of America Merrill Lynch (BofA-ML) report says.

According to the global financial services major, the implementation of the 7th Pay Commission recommendations should support consumption demand in the country but would limit planned expenditure.

“In response, we expect the RBI to cut rates by 25 basis points on April 5 as the fiscal deficit is already low compared to history,” BofA-ML said in a research note.

The Reserve Bank Governor Raghuram Rajan on February 2 left key interest rate unchanged citing inflation risks and growth concerns while pegging further easing of monetary policy on government’s budget proposals.

Rajan said RBI “continues to be accommodative” but would look forward to the government’s budget proposals on February 29 as also the inflation trend.

BofA-ML expects Budget 2016 to target a fiscal deficit of 3.8% of gross domestic product (GDP), a tad lower than the financial year 2015-16’s 3.9%, but higher than the pre-committed 3.5%. As per the revised fiscal consolidation roadmap, the government proposes to bring down fiscal deficit from 3.9% in the current fiscal to 3.5% in 2016-17.

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According to official figures, fiscal deficit — a gap between the government’s expenditure and revenue — in the nine months of 2015-16 worked out to 88% of the annual target as against 100.2% in the same period last fiscal. The improvement was mainly on account of buoyancy in tax collections, which have kept revenue deficit in check. According to the global brokerage firm, Budget 2016 will seek to balance growth and fiscal consolidation.

“We expect Finance Minister Arun Jaitley to walk the tightrope between supporting growth and fiscal credibility on February 29,” the report noted.