According to the global investment banking major, the RBI will continue to gradually shift its focus to reviving growth from exclusively fighting inflation since 2010 and is likely to cut rates in June by 25bp, and by 50bp in March 2014 quarter.
"It will likely pause in 2H13, with inflation set to climb to 7.5 per cent from 6.5-7 per cent in 1H13 on hikes in diesel prices and power tariffs," Bank of America Merrill Lynch economist Indranil Sen Gupta said in a research note adding that "the RBI will likely cut policy rates by 50bp again in the March 2014 quarter, as inflation subsides".
The RBI in its mid-quarter policy review of monetary policy on March 18 reduced the indicative policy rate (repo rate) by 25 basis points from 7.75 to 7.50 per cent. Repo rate is the rate at which banks borrow short-term funds from the central bank.
The Central Bank lowered key policy rates to revive growth. India's GDP growth in the third quarter of the current financial year stood at 4.5 per cent, the weakest it has been in the last 15 quarters.
BofA ML further said the RBI is expected to increasingly focus on improving liquidity to pull down interest rates to revive growth.
"It will likely cut CRR by 25 bp on May 3, to improve bank liquidity, and Open Market Operations (OMO) is likely to be at Rs 1.6 trillion in FY14," Gupta added.
According to the research note, lending rates are expected to come off by 25bp in mid-April, after the busy industrial season demand subsides, and by 75bp by FY14.
Gupta further noted that the recovery in the country's growth rate to 6 per cent in FY14 from 5 per cent this fiscal is predicted on two factors -- better rains and lending rate cuts.
Global growth is expected to stagnate at 3 per cent level and although India's reform initiatives have certainly boosted sentiment, investment is unlikely to revive until the summer 2014 polls, the report added.