RBI’s next rate cut in August, prospect hinges on monsoon: BofAML

The Bank of America Merrill Lynch report says lending rates are expected to come off 50-75 bps by September after the RBI emphasised on lower lending rates


RBI’s monetary policy committee decided unanimously to shift the policy stance from ‘accommodative’ to ‘neutral’ with no change in repo rate. Photo: Pradeep Gaur/Mint
RBI’s monetary policy committee decided unanimously to shift the policy stance from ‘accommodative’ to ‘neutral’ with no change in repo rate. Photo: Pradeep Gaur/Mint

New Delhi:Reserve Bank of India (RBI) may finally go for a 25 basis points rate cut in August if a good monsoon contains core inflation at a moderate 4-5%, says a Bank of America Merrill Lynch (BofAML) report.

BofAML had expected a 25 bps rate cut in the 8 February policy meet taking into account the demonetisation shock, low inflation, lower fiscal deficit and a stabilising US dollar.

“We have pushed our next and final 25 bps repo rate cut to August from April, if a good monsoon assures moderate 4-5% inflation as we expect,” Indranil Sengupta, India economist at Bank of America Merrill Lynch, said in a research note.

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The report noted that the RBI has also cut down inflation risks broadly in alignment with its own forecasts. “We are forecasting 3.3% in January, see a 50 bps downside risk to our 4.6% March forecast and 4% in the first half of 2017,” BofAML said, adding core inflation remains at a benign 4.6%.

The central bank in its policy review meet on 8 February kept key interest rate unchanged at 6.25% and said that it is awaiting more clarity on inflation trend and impact of demonetisation on growth. The next meeting of the MPC is scheduled on 5-6 April, 2017.

The report further said that lending rates are expected to come off 50-75 bps by September after the RBI emphasised on lower lending rates. “We continue to stick to our call of lower lending rates (50-75 bps by September),” it added.

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