Reserve Bank is likely to cut the repo rate by 25 basis points next month after retail inflation continued to remain benign in June, a report said today.
“We continue to expect the RBI to cut rates by 25 basis points on August 9 after June CPI inflation came in at a benign 5.8 per cent,” Bank of America Merrill Lynch (BofA-ML) said in a note, adding this would be the last rate reduction in the year.
Retail inflation measured on Consumer Price Index (CPI) stood at 5.77 per cent in June as against 5.76 per cent in the previous month and 5.40 per cent in June last year.
It said the compelling reason for an August 9 RBI rate cut is that a good monsoon should douse agflation (agriculture driven inflation) — a 5 per cent change in food prices swings CPI inflation by 250 basis points.
The American brokerage said the repo rate, at 6.5 per cent, has already dropped below the medium-term CPI average inflation of 6.9 per cent.
“We, of course, will review our RBI rate cut call after the appointment of the new governor and or monetary policy committee (MPC),” it said.
BofA-ML has cut it March CPI inflation forecast to 5.1 per cent from 5.7 per cent, in line with the RBI’s 5 per cent target, with rains likely to pull down pulses prices.
Above normal rains should also secure river water for a good rabi crop.
June core CPI inflation softened to 4.8 per cent from 5 per cent last month with poor growth curtailing pricing power.
“We forecast FY17 growth at 5.6 per cent in the old GDP series, well below our estimated potential of 7-7.5 per cent,” it said.