The Reserve Bank will opt for another 0.25 per cent decrease in key repo rate in its next monetary policy review on February 6, in what is expected to be the last cut in the current easing cycle, a foreign brokerage said on Tuesday.
"...we believe that RBI could continue to ease interest rates based on forward inflation rates staying benign and growth likely softening," economists at Bank of America said in a note.
There is an "uncertainty" in the growth outlook and the RBI is likely to utilise the policy space to take the repo rate down to 5.25 per cent.
The move will be accompanied by significant liquidity injections, with a slightly longer-term assurance on liquidity, the brokerage said.
In the report, which comes days after the central bank announced over Rs 2 lakh in liquidity infusions, the brokerage said that persistent forex interventions and volatile liquidity movements warrant "material liquidity support" from RBI to aid transmission of rate cuts.
The report further said that it does not see the weakness in the rupee becoming a significant source of noise for the rate cutting cycle.
"If RBI delivers a cut, we believe it would be the last cut in the cycle, but if it does not, RBI may continue to give a dovish guidance to keep its options open," it said.
Inflation is likely to undershoot RBI's near-term projections, and the central bank is also likely to raise its GDP growth forecasts, the report said.
The high-frequency data is showing some resilience, particularly in the industrial and consumer sectors, the report said, adding that RBI can draw some comfort from the same.
However, there are many moving parts which complicate the policy path, it said.
"Relative to the December meeting, the RBI has seen the macro-operating environment improve, but the market dynamics deteriorate, complicating the backdrop with which it approaches the February policy meeting," it said.
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