FY18 growth to recover to 7.2%; 25bps rate cut on August 2: Bank of America Merrill Lynch

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New Delhi | Published: June 1, 2017 6:01:48 PM

The country's economic growth is expected to recover to 7.2 per cent in new GDP series in financial year 2017-18 on lending rate cuts, says a survey.

Regarding the Reserve Bank’s policy stance, the report said on balance, we continue to expect the RBI to cut rates by 25 bps on August 2, with May CPI inflation slowing below 2.5 per cent. (Reuters)

The country’s economic growth is expected to recover to 7.2 per cent in new GDP series in financial year 2017-18 on lending rate cuts, says a survey. The data released by the Central Statistics Office (CSO) noted that the Gross Value Added (GVA) slipped sharply to 6.6 per cent in the last financial year ended March 31, from 7.9 per cent growth in 2015-16.

“…This confirms our standing view of a shallow recovery. We expect FY18 growth to recover to 7.2 per cent in new GDP series and 6 per cent in old series on lending rate cuts,” Bank of America Merrill Lynch (BofAML) said in a research note.

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Regarding the Reserve Bank’s policy stance, the report said on balance, we continue to expect the RBI to cut rates by 25 bps on August 2, with May CPI inflation slowing below 2.5 per cent. “We grow more confident of our contrarian call of a 25 bps RBI rate cut on August 2. We are tracking May CPI inflation at about 2.5 per cent, at the lower end of RBI’s 2-6 per cent mandate, with daily data showing food inflation continuing to fall in May on a good summer rabi harvest,” it added.

The Reserve Bank in its monetary policy review meet on April 6 kept the re-purchase or repo rate — at which it lends to banks — unchanged at 6.25 per cent but increased reverse repo rate to 6 per cent from 5.75 per cent.
RBI’s next policy review meet is in June 6-7.

The report noted that consumption demand will drive growth led by lower lending rates, 7th Pay Commission Award, and better monsoons pushing up rural demand. “We do not see material risk of second round inflation effects from the house rent allowance (HRA) hikes by the 7th Pay Commission as the first round effect itself is mostly statistical,” it added.

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