Bank of America Merrill Lynch (BoA-ML) believes that Fed tapering and rising rate hike expectations will stabilize global commodity prices, reduce 'imported' inflation and CPI/WPI inflation.

''Our US economists expect the first Fed rate hike in June. It is for this reason we see CPI inflation coming off to the RBI's 8% January 2015 and 6% January 2016 targets. After all, the pass-through to domestic oil prices should be complete by June even if oil settles at our house forecast of USD 108/bbl. If it persists at USD 90/bbl, our oil analyst, Vidyadhar Ginde, estimates that oil cos can cut diesel prices by Rs 3.5-4/liter reducing CPI inflation by 40-50bp,'' it said.

''Second, global agro commodity prices have also been coming off on good harvests. Finally, we continue to expect the RBI to hold Rs 58-62/USD with lower oil prices and gold import restrictions offsetting the stronger US Dollar. On balance, we expect RBI governor Raghuram Rajan to cut rates 75bp in 2015 from February onwards. Poor industrial growth numbers - 0.4% in August, 0.5% in July - only underscore our call that recovery will need lending rate cuts,'' it added.

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