Despite inflation, RBI to cut rates in Aug: BofA-ML

The Dollar Business Bureau

Bank of America Merrill Lynch (BofA-ML) said on Friday that it expects a rate cut by the Reserve Bank of India (RBI) in its policy announcement in August. The data put out by the RBI recently revealed a hike in headline inflation in the month of April it said.

BofA-ML said that the reading of 5.4 percent is just a little above 5.3 per cent, as estimated.

A poor winter crop (Rabi crop) could sustain inflation between 5 percent and 5.5 percent till the month of June. However, if prices of oil ease down to $39 per barrel, the inflation rate may further go down to less than 5 percent, it said.

The Bank said that this will create the possibility of a rate cut of 0.25 percent by the RBI Governor Raghuram Rajan in the policy announcement on August 9. The upcoming bi-monthly policy announcement by the Central Bank is due on June 7.

In a double blow to the Indian economy, growth of industrial output dropped to 0.1 percent in March, whereas the retail inflation surged to 5.39 percent in April. This may weaken the possibility for any immediate cut in rate by the RBI.

The slowdown in factory output growth is primarily the result of low performance in the mining and manufacturing sectors, along with reduction in the production of capital goods, whereas increasing prices of food pushed the inflation higher, reversing the latest downward trend.

Referring to the factory growth rate as ‘volatile’, the Bank said it was unusual as it came against an estimate of 2.6 percent.

Besides the rate cut, RBI should also raise liquidity supply in the market which will make sure a rate cut of 0.50 percent in lending for the borrowers by September, it added.

In April, RBI had cut the benchmark repo rate by 25 basis points to 6.5 per cent.