RBI May Cut Rates By 25 Basis Points In August, BofAML Says

Inflation is peaking off and the Reserve Bank of India is expected to cut rates by 25 basis points in August if monsoon is normal.

That's according to global financial services major Bank of America Merrill Lynch (BofAML), which says inflation risks in India are overdone.

January inflation stood at 5.1 percent, a shade below December's 5.2 percent, and BofAML is tracking February inflation at 4.7 percent with tomato/onion prices slipping.

"We expect the RBI MPC to look through the jump in inflation to 5.4 percent in April-June, as it is driven by base effects. Against this backdrop, we expect the RBI MPC to cut rates by a final 25 bps in August if the La Nina materialises," BofAML said in a research note.

The La Nina phenomenon gives a boost to Southwest monsoon.

The report further noted that while Budget 2018 has hiked minimum support prices, the inflationary impact is likely to be muted as ruling wholesale prices are already higher than the revised MSP.

"We estimate FY19 (2018-19) average inflation at 4.8 percent (adjusted for June quarter base effects), well within the RBI's 2-6 percent inflation target," the report said.

The Reserve Bank kept the key policy rate unchanged at 6 percent for the third consecutive time on February 7 in view of firming inflation.

In its policy review meet, RBI said it is expecting retail inflation to rise to 5.1 percent in the last quarter of the ongoing fiscal due to rising crude oil prices and hike in salary components of government employees. The central bank has also projected inflation to be in the range of 5.1-5.6 percent in the first half of 2018-19.