New Delhi: Inflation risks are overdone, and the Reserve Bank of India is expected to go for a rate cut in August, even as it may strike a “balanced tone” in the ensuing policy review meet next month, says a report.
According to Bank of America Merrill Lynch (BofAML), inflation risks are overdone and March inflation is likely at 4.2%, down from December’s 5.2% and well within RBI’s 2%-6% mandate.
The CPI inflation fell to a 4 month low of 4.44% in February. RBI takes into account retail inflation while formulating monetary policy. The report said a normal monsoon is expected to contain agflation. Besides, a hike in minimum support price (MSP) announced in the Budget 2018 will have limited inflation impact as the revised MSPs are below the market price for many kharif crops.
“We grow more confident of our call that inflation risks are overdone,” the report said. Moreover, there is a good possibility of a normal monsoon dousing agflation in the second half of 2018.
The central bank’s next monetary policy review is scheduled for 5 April. It had kept the policy rate unchanged in the February meeting on fears of inflation.
“We expect the RBI MPC to strike a balanced tone on April 5, with March quarter inflation set to average 4.6%, 50 bps below their 5.1% forecast. This backs our call of a final 25 bps cut in August if rains are normal,” the report noted.