The Reserve Bank is expected to cut policy rate by 25 basis points in August meet as inflation at around 6% remains in the “benign” zone and forecast of good monsoon is also expected to help, says a Bank of America Merrill Lynch (BofA-ML) report.
According to BofA-ML, investors should not read much into the higher May CPI inflation print at 5.76% as it was entirely driven by higher agricultural inflation.
“We expect RBI to look through the current temporary spike in agricultural inflation as it is expected to dampen beyond the next few months with good rains expected to bring in plentiful fresh harvests September onward,” BofA-ML said in a research note.
Going ahead, BofA-ML expects CPI inflation to stay elevated around 6% over the next 2-3 months on higher agricultural inflation. However, May core-CPI inflation remains benign and stable at 4.9%.
“We continue to expect RBI to cut policy rates by 25 bps on August 9. At the same time, the scope for further rate cuts is narrowing,” the report added.
Moreover, a shallow recovery favours RBI easing, the report said.
Industrial production contracted by 0.8% in April and has remained weak for six months now. At the same time, GDP growth as per old series has also “disappointed” at 4.9% in FY16 and is expected to grow at 5.8% in FY17, well below our 7-7.5% potential, BofA-ML said.
In its policy review meet on June 7, RBI governor Raghuram Rajan had kept interest rates intact citing rising inflationary pressure but hinted at a reduction later this year if good monsoon helps ease inflation.