The Reserve Bank is expected to cut key policy rates by 25 bps on August 2, which in turn will signal banks to cut lending rates before the busy industrial season sets in October, says a report. According to Bank of America Merrill Lynch, further delays in RBI rate cuts will likely endanger the much-needed bank lending rate cut before the busy industrial season.
“If the RBI MPC cuts on August 2, it will signal a lending rate cut to banks… After all, real lending rates are running at a 20-year high,” BofAML said in a research note. BofAML expects the RBI MPC to cut rates by 25 bps on August 2 if the rains are normal.
The global brokerage firm noted that May CPI inflation is expected at about 2.5 per cent and daily data show food inflation is falling even further in June on a good summer rabi harvest while the India Met has also upgraded its monsoon forecast to 98 per cent of normal from 96 per cent with the El Nino weakening. Further, core CPI inflation has slipped to a low 4.1 per cent.
In the monetary policy review on June 7, RBI left key rates unchanged with Governor Urjit Patel noting that the central bank wanted to be more sure that inflation will stay subdued. BofAML said that it disagrees with RBI MPC which said that “…premature action at this stage risks disruptive policy reversals later and the loss of credibility”.
It further noted that further delays in RBI rate cuts will likely endanger the much-needed bank lending rate cut before the busy industrial season sets in October.