Lone Analyst Betting on India Rate Cut Sticks to Contrarian Call

(Bloomberg) -- Bank of America Merrill Lynch economist Indranil Sen Gupta is sticking to his contrarian view of a cut in India’s interest rate despite policy makers talking about a possible hike amid stubbornly sticky inflation.

Sen Gupta, co-head of India Research at BAML in Mumbai, stands out in a crowd that’s betting the Reserve Bank of India could raise interest rates this year, with some, like Deutsche Bank AG forecasting a pre-emptive move as early as June. Markets are pricing in at least 50 basis points of rate increases in the coming 12 months.

BAML’s forecast for an August cut is based on slowing inflation and economic growth, but comes against the backdrop of higher oil prices, a weaker rupee and recent hawkish central bank commentary that appeared to prepare markets for a rate increase. Sen Gupta expects headline inflation will ease to 4.2 percent in April from 4.28 percent in March and dip below 4 percent by October, giving the central bank room to cut rates by 25 basis points in August.

“We are expecting growth to slow in the second half of the financial year as the base-effects fade,” he said in an interview in Mumbai on Wednesday. “Inflation should also hold around the levels the RBI is projecting.”

Here are the main reasons underpinning his views:

• Food Prices: A good rainfall in July should lead to lower food prices. India’s June-September southwest monsoon, which waters more than half of the country’s farmland, is expected to be normal this year, according to the weather office
• Oil Prices: If crude stays at current elevated levels, India doesn’t need to hike domestic prices or cut duties to offer relief to consumers, given the percentage move in oil prices isn’t as big as it was when oil was at $30 or $40 a barrel. Brent crude oil advanced 0.7 percent to reach $77.72 per barrel on Thursday after earlier touching $78 a barrel. The RBI expects oil prices averaging around $78 a barrel to stoke inflation by 30 basis points.
• Rate Hike: Policy tightening to address rupee weakness could lead to more weakness in the currency. A rate hike will hurt stock market inflows as it will spook investors who will grow less confident about growth

--With assistance from Saket Sundria Kartik Goyal and Subhadip Sircar

To contact the reporters on this story: Anirban Nag in Mumbai at anag8@bloomberg.net, Subhadip Sircar in Mumbai at ssircar3@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karthikeyan Sundaram

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