Normal monsoon rains this year should allow the RBI to cut rate by 0.25% in August, says BofA-ML.
New Delhi: Normal monsoon rains this year should continue to revive rural demand and allow the Reserve Bank of India to cut rates by 25 basis points in August, according to a report by Bank of America Merrill Lynch. According to the global financial services major, rural demand is already reviving and the autumn kharif farm income has jumped by 26 per cent last year. The coming rabi wheat harvest in May should also push up farmer income by a good 13 per cent, BofA-ML said, adding that if rains are indeed normal, Consumer Price Index-based inflation in the first half of this year should average a benign four per cent.
"With growth running at 4.5-5 per cent in the old GDP series, well beyond our estimated 7 per cent potential/trend, there is surely little chance of demand-led inflation. This, in turn, supports our call of a 25 bps RBI rate cut in August," it said.
In its monetary policy review meet on April 6, the Reserve Bank of India kept the repurchase or repo rate - the rate at which it lends to banks - unchanged at 6.25 per cent but increased reverse repo rate to 6 per cent from 5.75 per cent.
The next bi-monthly policy review meeting of the Reserve Bank of India is in June.
According to BofA-ML, inflation risks are overdone. On one hand weak growth continues to curb pricing power and food inflation is coming off and on the other hand, though El Nino is a risk, the RBI has itself highlighted the importance of supply management as a policy response.
Moreover, BofA-ML commodity strategists expect commodity prices to stabilise in 2017, reducing the pressure on imported inflation by the first quarter of 2018.
In an earlier report, BofA-ML had said that potential imported oil/commodity price inflation is expected to cool in 2017.
"Our commodity strategists expect Brent to recover at $61/bbl in 2017 after falling to $44/bbl in 2016 from $52/bbl in 2015," it had said.
This should cool dated Brent price inflation (and WPI) to 10-15 per cent in the first quarter of 2018 from current 50 per cent levels, it added.
The global brokerage firm further said that investors should focus on consumption driven sectors.
"We grow more confident of our standing call that investors should play consumption over investment after the Met forecast a normal southwest monsoon."