RBI May Cut Interest Rate In August As Core Inflation Falls: Bank Of America Merrill Lynch
The RBI may reduce the key interest rate by 25 bps in August: says BofA Merrill Lynch.
The Reserve Bank of India (RBI) is likely to cut its key repo rate by 25 basis points in August due to the falling core inflation and lack of growth, the Bank of America Merrill Lynch said in a recent research report. The rate cut, however, would only be carried out if there is a good monsoon, it added.
India's core consumer price index (CPI) based inflation slipped to 4.5 percent from 4.6 percent in December 2016, highlighting a downside risk to the the central bank’s 5 percent forecast for March, according to the research report titled India Economic Watch.
The economy, which is still recovering from the shock of demonetisation, was growing at 4-4.5 percent even before the government’s decision to scrap old high-value currency notes, it said. This is well below the central bank's estimated 7 percent growth potential, leaving room for monetary easing. Even the RBI has acknowledged the slack in the economy, the report said, justifying its estimations.
The Data Will Show
In its last monetary policy on February 8, the RBI changed its stance from accommodative to neutral, allowing “sufficient flexibility to move… in either direction, depending on future data”, in the words of RBI Governor, Urjit Patel. The main reason given for maintaining the interest rate was a stubborn core inflation figure.
However, Monetary Policy Committee (MPC) would “likely wait” to see the benefits from demonetisation and higher interest rates. Additionally, the rate cut will depend on whether the country receives a season of normal rainfall which generally dictates the price of food and basic goods, the report said.
The report further expects the core inflation to stand around 4 percent in March 2017, at the mid-point of RBI's 2-6 percent target. The possible rate cut should also support the rupee, attracting foreign portfolio investments in equity at a time of global uncertainty, it added.