BofAML Expects 40 Basis Points Interest Rate Cut By February Despite High Inflation

Headline inflation is bound to rise further to 5 percent for November, but despite the pinch in price rise, the Monetary Policy Committee will go for two consecutive rate cuts on growth concerns, a report said on Thursday.

The consumer price inflation fastened to 4.62 percent for October in official data released on Wednesday, resulting in concerns over RBI’s rate stance, given that the central bank is mandated to keep the number at 4 percent.

GDP growth plummeted to a six-year-low of 5 percent for the June quarter and is expected to come lower for the September quarter and some analysts are also expecting it to slip below the 5 percent for the fiscal year 2020.

Analysts at foreign brokerage Bank of America Merrill Lynch said the RBI will cut rates by 0.25 percent in December, and follow it up with a 0.15 percent in February.

It can be noted that house economists at State Bank of India have warned against rate cuts to push up growth flagging the risk of "financial instability" that it can cause.

The higher inflation will be driven by base effects or lower inflation in the year-ago period when the same number had dipped to 2.2 percent, and some pressure on onion prices, they said in a note.

It said the "fundamental drivers of inflation remain weak" which have resulted in the non-food and non-fuel core inflation getting limited to 3.3 percent in October as against September's 3.7 percent.

On the growth front, it said the dampness will continue for at least one more quarter and estimated growth by gross added basis to slip to 4.7 percent in September from 4.9 percent in June.

Additionally, agflation will also be in check going forward on well-stocked rivers which should water a bumper winter sowing and the minimum support price hikes are also small, it said.

Despite a 0.5 percent expected slippage in fiscal deficit to 3.8 percent, which fuels inflations, the number is still lower than the medium term average of 4.5 percent, it said.

"Should fiscal policy not be counter-cyclical in a slowdown as sharp as this? Yes, funding the 0.8 percent of GDP corporate tax rate cut will likely need additional direct or indirect monetisation," it said.