BofA Sees RBI Making 0.75% Rate Cut; Lowers India's Growth Forecast

Bank of America (BofA) Securities lowers India's growth forecasts on COVID-19 related shutdowns and suggested a sharp benchmark rate cut by RBI to curb the damage.

The global brokerage firm cut India's growth forecasts by 30 and 80 basis points (bps) to 4 percent each for the March and the June 2020 quarters.

A large number of businesses, especially those in the leisure, travel and hospitality sectors have been hit hard due to preventive measures taken to control the spread of infection, including the closure of shops and malls.

BofA Securities highlighted that high real lending rates continue to exert a drag on growth. It said that while nominal bank MCLR (Marginal Cost of Fund Based Lending Rates) has so far fallen 54 bps in the current fiscal on RBI easing, real MCLR has jumped 67 bps with core WPI (Wholesale Price Index) inflation falling.

"We expect the RBI MPC to cut rates by 25bps before or on April 3 with the FOMC cutting 150bps. Second, it will likely cut again in June with inflation set to fall to its 2-6 per cent mandate. Finally, we expect the RBI MPC to cut in October as base effects and weak demand will likely drag inflation down to 2.5 per cent in 2HFY21," it said in a note.

The report prepared by Indranil Sen Gupta and Aastha Gudwani said BofA India Activity Indicator continues to point to a long bottom but added that shutdowns needed to contain the Covid-19 outbreak will likely pull down activity.