BackRBI will cut interest rate in August: BofA
BofA is sticking to its call for an interest-rate cut in August even after consumer prices rose at the fastest pace in almost two years
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Mumbai: Bank of America Merrill Lynch is sticking to its call for an interest-rate cut in India next month even after consumer prices rose at the fastest pace in almost two years.
“A good monsoon should douse agflation," Mumbai-based BofAML economist Indranil Sen Gupta wrote in a report, adding that the recent “overshoot" in costs is “largely driven" by 27% pulses-price inflation as production dropped about 11% over the past two years due to poor rains. He expects the Reserve Bank of India to lower the benchmark repurchase rate by 25 basis points at the 9 August policy review.
A pickup in monsoon rains this month has spurred optimism that better crop output will help contain food costs, which have a significant bearing on overall inflation, sparking a rally in sovereign bonds. India is the world’s biggest producer and consumer of pulses. Prices of the beans, chickpeas and lentils as a group have risen between 20% and 40% each month for the past year.
The June-September seasonal showers, which affect both summer and winter sowing, are predicted this year to be the highest in 22 years after back-to-back droughts. Consumer prices rose 5.77% in June from a year earlier, the fastest pace in 22 months.
Inflation forecast
“We have cut our March CPI inflation forecast to 5.1% from 5.7%, in line with the RBI’s 5% target, with rains likely to pull down pulses prices," Gupta wrote. “We expect pulses prices to ease by 20% this year."
The yield on government notes due January 2026 has slumped 18 basis points this month and closed at 7.27% on Wednesday, the lowest for a benchmark 10-year security since June 2013. It was little changed on Thursday. The rupee fell 0.1% to 67.23 per dollar as of 10:46am in Mumbai.
RBI Governor Raghuram Rajan, whose term ends early September, last reduced the repo rate in April to a five-year low of 6.50%. Speculation that his successor, who is yet to be named, will be more dovish has contributed to the rally in bonds. Bloomberg
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