Three reasons why BoFA-ML expects RBI to cut rates in April

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Published: January 25, 2018 3:50:40 PM

Even if the headline inflation surged to 5.2 percent in the month of December, Reserve Bank of India (RBI) will still slash rates by 0.25 percent in the April review of the monetary policy, Bank of America Merill Lynch said in a research note.

brokerage said there are "fundamental reasons" which suggest that inflation is not going upbrokerage said there are “fundamental reasons” which suggest that inflation is not going up.

Even if the headline inflation surged to 5.2 percent in the month of December, Reserve Bank of India (RBI)  will still slash rates by 0.25 percent in the April review of the monetary policy, Bank of America Merill Lynch said in a research note. “We expect the RBI monetary policy committee (MPC) to look through the jump in inflation to 5.4 per cent in April-June, that is spooking some in the markets, as it emanates from the base effects of low 2.2 per cent April-June 2017 inflation,” it said. “We still expect the RBI MPC to cut policy rates by a final 0.25 per cent in April,” it added. Here are the three key reasons why Bank of America Merill Lynch expects the central bank to cut rates in April:

1)The brokerage said there are “fundamental reasons” which suggest that inflation is not going up, which also include the excess capacity at present which affects pricing and also the possibility of a weak La Nina weather pattern which will dampen food prices in the second half of 2018.

2)It said that fears of inflation getting “generalised” are also overdone, as only two sub-categories of fuel and light and housing (accounting for 22 per cent of the basket) have seen a price-rise above the headline 5.2 per cent.

3) The foreign brokerage says while the fuel is due to the crude prices rally, it said the crude prices will come-off by $10 to $62 per barrel by December 2018. The housing component is attributable to a “statistical impact” because of the increase in housing rent allowance (HRA) for Central government employees on the 7th Pay Commission recommendation.

As wholesale inflation eased to 3.58 percent in December, India Inc last week urged the Reserve Bank to reduce key policy rates to augment investments and boost economic growth. “As the inflation numbers are being driven largely on account of supply side factors, we urge the Reserve Bank of India to calibrate its monetary policy stance giving equal weightage to growth consideration. “Lowering of the repo rate in the upcoming monetary policy is critical to boost investments and build the growth momentum at this juncture,” Ficci President Rashesh Shah had said.

With PTI inputs

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