The Reserve Bank is expected to cut rates in its August 9 policy review meet, as normal rains is expected to contain agricultural inflation and help in the uptick of rural demand conditions, says a report.
According to global financial services major, Bank of America Merrill Lynch (BofA-ML), if rains arrive on time, it would result in a pickup in rural demand, and in turn a consumption driven economy.
Moreover, the global brokerage firm said that since the Australian Weather Bureau has declared that the El Nino is fading after two years, it augurs well for India’s June- September monsoon that waters the kharif sowing.
“We continue to expect the RBI to cut rates by 25 bps on August 9 assuming normal rains damp agflation,” BofA-ML said in a research note.
The report further added that “if the Met’s forecast of 106 per cent of normal rains comes true, we should see a pick-up in rural demand, supporting our theme of consumption over demand”.
Meanwhile, other key drivers – softer lending rates, seventh Pay Commission outgo, and higher household savings on lower oil prices – are already in place.
“A good monsoon should damp agflation and allow the RBI to cut on August 9, in our opinion,” it added.
Earlier in April, RBI reduced its policy rate by 0.25 per cent to 6.5 per cent. While this was the first rate cut after a gap of six months, RBI has lowered its rate by 1.5 per cent cumulatively since January 2015.
However, the industry still wants further rate cuts from RBI to boost investment.