RBI may go for 25 bps rate cut in Aug, prospect hinges on monsoon: BofAML

The report noted that RBI also cut down inflation risks broadly in alignment with its own forecasts

Reserve Bank may finally go for a 25 basis points rate cut in August if a good monsoon contains core inflation at a moderate 4-5 per cent, says a Bank of America Merrill Lynch (BofAML) report.

BofAML had expected a 25 bps rate cut in the February 8 policy meet taking into account the demonetisation shock, low inflation, lower fiscal deficit and a stabilising US dollar.

"We have pushed our next and final 25 bps repo rate cut to August from April, if a good monsoon assures moderate 4-5 per cent inflation as we expect," Indranil Sengupta, India economist at Bank of America Merrill Lynch, said in a research note.

The report noted that the RBI has also cut down inflation risks broadly in alignment with its own forecasts.

"We are forecasting 3.3 per cent in January, see a 50 bps downside risk to our 4.6 per cent March forecast and 4 per cent in the first half of 2017," BofAML said, adding core inflation remains at a benign 4.6 per cent.

The central bank in its policy review meet on February 8 kept key interest rate unchanged at 6.25 per cent and said that it is awaiting more clarity on inflation trend and impact of demonetisation on growth.

The next meeting of the MPC is scheduled on April 5 and 6, 2017.

The report further said that lending rates are expected to come off 50-75 bps by September after the Reserve Bank emphasised on lower lending rates.

"We continue to stick to our call of lower lending rates (50-75 bps by September)," it added.