The Reserve Bank is expected to cut key interest rate in December amid receding inflation and signal lower rates before the busy October-March industrial season intensifies, says a report. According to global financial services major Bank of America Merrill Lynch (BofAML), retail inflation is expected to stay muted at around 3.5 per cent in September and 3.3 per cent in October, which will give RBI the room to ease interest rates. India’s retail inflation had swelled to 5-month high of 3.36 per cent in August on costlier vegetables and fruits.
According to the report, tomato and onion price spike is receding and this will ease inflation going forward as a 5 per cent change in agflation impacts CPI inflation by 50 bps. BofAML said fresh supplies are likely to have pulled down tomato prices by 32 per cent month-on-month in September and on top of that by 25 per cent month-on-month in October so far. Moreover, onion prices have also corrected 4.4 per cent in October so far with imports from Egypt, the report said, adding that this has pulled down tractable overall agflation to 1.4 per cent in September and 0.5 per cent in October.”We grow more confident of our call of a 25 bps RBI rate cut on December 6 with the spikes in tomato and onion prices receding,” BofAML said.
The rate cut, it added, will signal a bank lending rate cut before the ‘busy’ October-March industrial season intensifies.The report noted that lending rate cuts will spur demand, put idle factories to work, exhaust capacity and spark off investment. Reserve Bank of India, in its policy review meet on October 4, kept benchmark interest rate unchanged on fears of rising inflation while lowering growth forecast to 6.7 per cent for the current fiscal.