The RBI Monetary Policy Committee will announce its decision on the policy rate on August 6. The central bank this year has cumulatively slashed 115 basis points and the Street is expecting another 25 bps rate cut in this policy, from 4 percent to 3.75 percent.

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Bank of America Securities (BofA Securities), in a recent report, mentioned that it continues to expect a 25 bps rate cut in August and another 75 bps in FY21.

With rising inflation and uncertain economic outlook, the brokerage believes that rate cut is required to boost liquidity in the economy.

The RBI, in its previous policy meet held in May, had cut 40 basis point reduction in repo rate to 4 percent. The June meeting was shifted to May amid the pandemic. It had also cut 75 basis points in its March policy meet.

In the last RBI MPC minutes, RBI Governor Shaktikanta Das had reiterated "the RBI shall not hesitate to use any conventional and unconventional tool to revive the macroeconomy and preserve financial stability while adhering to the inflation target".

Here are six reasons why BofA Securities believe 25 bps rate cut is in the cards:

1) FY21 GDP contraction: As per the brokerage, COVID-19 shock is set to contract GDP by 20 percent in the June quarter and 6 percent in FY21. In this scenario, the brokerage assumes that current Unlock restrictions extend to mid-November with the restart taking six weeks to December. It further noted that a month of lockdown would cost 100 bps of annual GDP and given labor dislocations and expected six weeks of re-start will cost 120 bps.

2)CPI inflation: The brokerage expects inflation to be around 6.4 percent in July owing to high oil prices, gold prices even as food inflation softens. It added that with inflation above RBI's target of 2-6 percent, RBI will need to cut rates. It also added that it forecasts CPI inflation slipping to 2.5 percent in the second half of FY21.

3) High real lending rates: BofA believes that high real lending rates will delay recovery beyond COVID-19 shock. While nominal MCLR has come off by 105 bps since March 2019, real MCLR has gone up by 44 bps, it noted. Similarly, average nominal lending rates have come off by 37 bps since March 2020 but real lending rates went up 147 bps leading to far lower credit flows in 2020 than 2019 last year. The nominal interest rate is the interest rate before taking inflation into account, in contrast to real interest rates.

4) Busy' industrial season begins in October: Time is running out with the 'busy' industrial season beginning October, said the brokerage. As loan demand picks up seasonally, the transmission of RBI easing would become far more difficult, explained BofA.

5) Rising M3 growth: Rising M3 growth, at 12.4 percent as against 9.1 percent optimal, constrains the RBI from trying to contain yields through quantitative easing as freely as in the past. M3 is a measurement of money which includes money in circulation plus checkable deposits in banks (M1) plus money in savings deposits and money market mutual funds (M2) plus large time deposits in banks.

6) Adequate forex reserves: Adequate forex reserves should provide room for the RBI to cut rates and support recovery, said the brokerage, adding that it estimates RBI can sell $50 billion to defend rupee in case of a speculative attack.

In the brokerage's base-case scenario, it expects RBI to cut 100 bps in FY21 - 25 bps on August 25, followed by 50 bps in October and 25bp in December. In bear case, BofA Securities sees GDP contraction at 7.5 percent and a 200 bps rate but in FY21.