RBI may raise policy rates by 25-35 basis points: BofA

The Reserve Bank of India (RBI) could announce a 25-35 basis points rate hike in its upcoming policy meeting, Bank of America (BofA) said in a report said after retail inflation jumped to 7% in August from 6.7% in July.

Activity indicators seem to be losing momentum as highlighted by the IIP data which naturally “deepens the dilemma” for RBI Monetary Policy Committee (MPC), BofA further said.

Industrial activity decelerated sharply to a four-month low of 2.4% in July from 12.7% in June as a favourable base effect faded and consumer demand showed signs of slowing down, official data showed.

“We have been arguing that a sub-7% CPI inflation print would have offered the RBI MPC some comfort to consider a more measured hike on Sep 30th.

Yesterday’s CPI inflation outturn doesn’t pose any upside risks to the full-year CPI inflation trajectory but doesn’t offer much comfort either, economists at BofA said in a report.

The report further said that while some increase in food inflation was expected given less favorable base effects and sequential increase in the price of cereals, the miss vs expectations was on account of higher vegetable inflation.

“We have been highlighting the risk of inadequate Kharif crop sowing. As of 2nd Sep, the area sown under Kharif crops was down 1.3% YoY and the area sown under rice is down 5.6% YoY.

Despite 5% above normal rainfall, sowing hasn’t been encouraging due to skewed spatial distribution. Early estimates suggest this could shave off 10-15MT from rice production this year. We have seen some uptick in domestic prices of both wheat and rice,” the report added.