In its recent report, Bank of America Merrill Lynch (BofA-ML) opined that the Reserve Bank of India (RBI) may not reduce policy repo rate until the volatility in the currency market subsides.
According to the brokerage, the central bank may prefer to reduce Cash Reserve Ratio (CRR) by 25 basis points on July 30 instead of cutting policy rates if the Indian currency remains volatile.
Highlighting the importance of monetary policy transmission, the report noted that economic growth may not recover until the rise in broad money supply reduces lending rates.
The brokerage feels that the RBI has to recoup foreign exchange reserves to stabilize the rupee. As of now, the firm expects RBI to defend Rs 60 per dollar as a breach will surely push up expectations towards Rs 63 per dollar.
BofA-ML suggested that RBI must use the policy like NRI bonds, raising FII debt limits, hikes in FDI in telecom, defense and supermarkets, issuing sovereign debt to support rupee.
The bank expects good rains to douse agflation, as initial supply disruptions are resolved. In the research report, the brokerage noted that the monsoon – 37 percent above normal – is progressing well.
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