The worst is over for the Indian economy, but it is expected to see a shallow recovery based on better rains and lending rate cuts, says a report by Bank of America Merrill Lynch.
According to the global brokerage firm, growth will not bottom out until lending rates come off as rates in India are still stuck at their 2008 cyclical peak.
"We have grown more confident of our view that the best we can expect is a shallow recovery on better rains and lending rate cuts," BofA-ML said in a research note, adding "lending rate cuts are the only doable option to stimulate demand at this stage of the global cycle."
According to BofA-ML banks, should be able to cut lending rates by another 0.50-0.75 per cent.
"Recovery will come, as all recoveries do, from lending rate cuts and sneering at them as "temporary solutions" is delaying the turnaround," Indranil Sen Gupta India Economist at DSP Merrill Lynch said in a research note.
The Reserve Bank of India Governor D Subbarao had earlier echoed Finance Minister P Chidambaram's sentiments and urged banks to pass on the benefit of rate cuts to customers.
The RBI this year has already cut repo rate-the rate at which it lends short-term money to banks-by 0.75 per cent bringing it down to 7.25 per cent.
The country's economy is 2012-13 grew at a decade-low 5 per cent, while credit growth also fell to 15.62 per cent from 17.76 per cent in 2011-12.
Although some government banks are responding to the Finance Minister's call to cut lending rates, tight liquidity remains a constraint, the report said.