Abu Dhabi: Bank of America Merrill Lynch expects the Reserve Bank of India (RBI) to cut the cash reserve ratio (CRR) by 25 basis points at its next policy meeting on July 30 in a bid to revive economic growth in the South Asian country.
“With good rains set to douse agflation, there is a strong case for monetary easing in our view. At the same time, the RBI may not want to court controversy by cutting repo rate if INR [Indian rupee] volatility persists. A CRR cut should help bring down lending rates by improving bank liquidity,” the bank said in its latest report.
“We expect [the RBI] to cut the CRR on July 30, if INR remains volatile. This, in turn, will allow it to improve bank liquidity and bring down lending rates. At the same time, the RBI is unlikely to take any chances with the INR as the import cover of its foreign exchange reserves have halved to seven months in the past four years,” it added.
The report said the RBI’s stakes are “extremely high in the ongoing battle for INR60 per US dollar. If the RBI loses, market expectations will swing towards INR63/USD, pushing up inflation as a 10 per cent depreciation of the rupee impacts inflation by about 1 per cent.”
New record lows
India’s rupee is widely expected to plunge to new record lows in the days ahead, with a strong likelihood the South Asian currency would drop to 62 levels to the US dollar and 17 to the UAE dirham on the back of increased outflows from foreign institutional investors who have been dumping rupee-denominated assets in favour of the greenback.
The outflows became more pronounced after US Federal Reserve Chairman Ben Bernanke said last month that the Fed would start scaling back its $85 billion-a-month emergency bond buying programme later this year as growth in the world’s largest economy takes hold.
On Friday, the rupee dropped to an intra-day low of 60.59 rupees to the US dollar — near its record low of 60.76 on June 26. It later pared some of its losses to close at 60.22 rupees to the dollar.
The next support levels for the Indian rupee are being seen at 61.70, 62.50 and 62.70 to the dollar.
The Indian currency, which has fallen by more than 10 per cent in 2013, is the worst performing currency among major Asian countries.
