Economic recovery to hinge on two 'R's of better rains and lending rate cuts: BofA-ML

NEW DELHI: The country's economic recovery will hinge on the two 'R's of better rains and lending rate cuts, says Indranil Sen Gupta, India Economist at Bank of America Merrill Lynch (BofA-ML).

In its latest report following the Reserve Bank of India's (RBI) move to cut both repo rate and CRR by 25 basis points, the bank says that growth will bottom out in the middle of 2013. "India is a rare economy in today's world in which lending rates are ruling at their 2008 peak," the report adds.

According to the bank the country's slowdown can be decomposed into various factors that have contributed to it. "We have decomposed India's 250 basis points slowdown to slower global growth (100 bps), RBI tightening (7 5bps), lower capex (50 bps) and poor rains (25bps)," the report says.

BofA-ML highlights that the RBI has also cut the growth forecast from 5.8% to 5.5%. "Our economists expect world growth to stagnate at 3%. We do not expect the Indian investment cycle to pick up until the summer 2014 polls," the bank says.

In response to the RBI's move to cut repo rate by 25 basis points, BofA-ML expects banks to reduce lending rates by 25 bps now and 100 bps by March 2014. "Although high lending rates are hurting loan demand, they are not coming down because the $35 billion of RBI forex intervention has pulled down deposit growth even further," the report adds.

BofA-ML sees in the RBI cutting policy rates by 25 basis points each on May 3 and in its monetary policy review in June.

On the issue of inflation the report says that inflation will be range bound around 7% till the summer. "We expect RBI to pause in H2 2013 as inflation will cross 7.5% on diesel price and power tariff hikes. It will likely cut 50 bps again in the March 2014 quarter as inflation subsides," the report says.

The bank continues to expect that RBI will hold rupee in the 52-56 range versus the US dollar for the time being.