CPI inflation is well within the RBI's 2-6 per cent mandate and the March number makes the case for a 25 bps rate cut in August even stronger, says a Bank of America Merrill Lynch (BofAML) report.
"We continue to expect the RBI MPC to cut policy rates 25 bps on August 3 after CPI inflation came in at a weak 3.8 per cent for March and industrial production contracted by 1.2 per cent for February," BofAML said in a research note.
According to the global financial services major, inflation risks are overdone and noted that food inflation is coming off while El Nino is a swing factor and commodity prices are likely to stabilise in 2017, reducing the pressure on imported inflation.
"We continue to see CPI inflation well within the RBI's 2-6 per cent mandate. March CPI inflation, at 3.8 per cent, actually came in below our 4 per cent expectations. Core CPI inflation has slipped to 4.2 per cent from 4.8 per cent in October with weak growth curbing pricing power. On our part, we see CPI inflation at 4 per cent in the first half of 2017," the report said.
The report further noted that stable commodity prices are expected to cool imported oil inflation.
"We expect potential imported oil or commodity price inflation to cool in 2017. Our commodity strategists expect Brent to recover at USD 61 per bbl in 2017 after falling to USD 44 in 2016 from USD 52 in 2015," BofAML said.
The Reserve Bank in its monetary policy review on April 6 kept the repurchase 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.
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