Inflation is peaking off and the Reserve Bank of India (RBI) is expected to cut rates by 25 bps in August if monsoon is normal, says a report. According to global financial services major Bank of America Merrill Lynch (BofAML), inflation risks are overdone.
January inflation stood at 5.1 per cent, a shade below December’s 5.2 per cent, and BofAML is tracking February inflation at 4.7 per cent with tomato/onion prices slipping.
“We expect the RBI MPC to look through the jump in inflation to 5.4 per cent in April-June, as it is driven by base effects. Against this backdrop, we expect the RBI MPC to cut rates by a final 25 bps in August if the La Nina materialises,” BofAML said in a research note.
The La Nina phenomenon gives a boost to Southwest monsoon. The report further noted that while Budget 2018 has hiked minimum support prices, the inflationary impact is likely to be muted as ruling wholesale prices are already higher than the revised MSP.
“We estimate FY19 (2018-19) average inflation at 4.8 per cent (adjusted for June quarter base effects), well within the RBI’s 2-6 per cent inflation target,” the report said.
The Reserve Bank kept the key policy rate unchanged at 6 per cent for the third consecutive time on 7 February in view of firming inflation.
In its policy review meet, RBI said it is expecting retail inflation to rise to 5.1 per cent in the last quarter of the ongoing fiscal due to rising crude oil prices and hike in salary components of government employees.
The central bank has also projected inflation to be in the range of 5.1-5.6 per cent in the first half of 2018-19.