Bank of America Merrill Lynch (BoA-ML) believes that RBI may cut rates if the Fed hikes in 2015. ''We see the RBI cutting policy rates by 75-100bp starting early 2015 even if Fed chair Janet Yellen hikes from September 2015, as our US economists expect. In our view, RBI and Fed monetary policy is no longer synchronous. We believe that the rate differential, at 800bp, is already far higher than the average 460bp since January 2003,'' it said.

''Second, it is really high FX reserves rather than the rate differential that holds the key to INR stability. High import cover allowed for a sustainable appreciation of the rupee during 2006- 2008 although the rate differential on average was a mere 180bps. Rising rate differentials could not prevent depreciation during 2011-13 as the import cover halved to 7 months,'' it said.

''Finally, Fed tightening will likely contain 'imported' inflation by stabilizing commodity prices. Assuming normal rains, stable oil prices and a stable rupee, we expect CPI inflation to come off to 6% levels by January 2016 in line with the RBI's targets. We continue to expect the RBI to hold Rs 58-62/USD if the US Dollar continues to trade at 1.30s/Euro levels,'' it added.

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