The Reserve Bank of India is expected to cut key policy rates by 25 basis points each in February and April 2015 to bring the repo rate down to 7.5 per cent from 8 per cent currently, says a Goldman Sachs report.
"We have changed our rate call to build in 50 bps of rate cuts by the RBI in 1H2015 from our earlier call of RBI on hold," Goldman Sachs said in a research note adding "we expect the RBI to cut by 25bps each in February and April".
The global financial services major had earlier said that the central bank would keep its policy rates on hold.
The change in the global brokerage firm's rate cut view is largely because of the recent sharper than expected fall in headline inflation, contained core prices, and no sharp increase in food prices despite a weak monsoon.
Goldman Sachs noted that the RBI would not launch into an even more aggressive rate cutting cycle due to three reasons -- entrenched inflation expectations, uncertainty about commodity prices and a new inflation targeting framework.
Moreover, the global brokerage major said both the trajectory and level of headline consumer prices and wholesale prices will give some comfort to the RBI.
"We cut our FY16 CPI inflation forecast substantially, to 5.8 per cent from 7.0 per cent earlier," it added.
Food prices are showing a lower trajectory than in previous few years, in part due to weak global agriculture prices, second round effects of weak fuel and transportation costs, and recent government measures to lower food prices such as lower minimum support price increases.
"With these forecasts, we think the RBI can meet its 6 per cent target by January 2016. “Near term risks to inflation are firmly to the downside.
“Given these forecasts, and the lags in transmission, we think the RBI will start cutting rates at its policy meeting in February," the report said.
Reserve Bank Governor Raghuram Rajan in September policy review left all key rates unchanged citing continued risks to inflation and difficult external situation especially on the geopolitical front.
This was the fourth consecutive time that the RBI has kept key interest rates unaltered.
The short-term lending rate (repo) rate remained at 8 per cent, and the cash reserve requirement of banks at 4 per cent.
RBI's next policy review is on December 2.
