Reserve Bank is expected to cut policy rate by 25 basis points in August meet as inflation at around 6 per cent remains in the "benign" zone and forecast of good monsoon is also expected to help, says a BofA-ML report.
According to global financial services major Bank of America Merrill Lynch investors should not read much into the higher May CPI inflation print at 5.76 per cent as it was entirely drive by higher agflation (agricultural inflation).
"We expect RBI to look through the current temporary spike in agflation as it is expected to dampen beyond the next few months with good rains expected to bring in plentiful fresh harvests September onward," BofA-ML said in a research note.
Going ahead BofA-ML expects CPI inflation to stay elevated around 6 per cent over the next 2-3 months on higher agflation. However, May core-CPI inflation remains benign and stable at 4.9 per cent.
"We continue to expect RBI to cut policy rates by 25 bps on August 9. At the same time, the scope for further rate cuts is narrowing," the report added.
Moreover, a shallow recovery favours RBI easing, the report said.
Industrial production contracted by 0.8 per cent in April and has remained weak for six months now. At the same time, GDP growth as per old series has also "disappointed" at 4.9 per cent in FY16 and is expected to grow at 5.8 per cent in FY17, well below our 7-7.5 per cent potential, BofA-ML said.
In its policy review meet on June 7, RBI Governor Raghuram Rajan had kept interest rates intact citing rising inflationary pressure but hinted at a reduction later this year if good monsoon helps ease inflation.
