Expect RBI to cut rates in March: BofA ML

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The sharp deceleration in the Indian economy, caused by 13 interest rate hikes over 20 months until October 2011, has turned the table in favour of a rate cut. Speaking to CNBC-TV18, Indranil Sengupta of BofA ML said January inflation is likely to come in at 6.7% and expects the Reserve Bank of India (RBI) to slash rates in its March 15 policy meet.

He said manufacturing inflation is likely to decline while bond yields will remain ranged between 8-8.5%.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What is the kind of inflation number that you are going with today?

A: We are also looking at 6.7%.

Q: The one that is trickier within that 6.7% is what happens on the manufacturing index. Over there what do you have pencilled?

A: Within the manufacturing inflation, numbers will begin to come down because you see growth slipping away given the high rate regime. I do not think anyone has pricing power left in the economy. So I think manufacturing inflation which is the core inflation is kind of peaking and will fall on from hereon.
 
Q: If we do get a 6.7% number today, do you think it will be enough for the RBI to move in March or are you expecting a move only post budget?

A: We expect a move in March. On February 29th, there is a strong possibility that we get December quarter GDP number at 6%. So given that growth is slowing, that inflation is peaking, I would think waiting further will only pull on the pain. So we do expect the RBI to cut on March 15th.
 
Q: When do you think the base effect starts waning off a bit? In the current month, the base effect was particularly strong.

A: Yes, somewhere in the middle of the year you will see the base effect going away. Much more importantly when would the oil and power tariff hikes take place is the question. If there are hikes somewhere in the middle of the year, we will see a rebound in inflation to 7.5% level somewhere around July-August.

If however the FM raises oil prices on budget day then yes, you see inflation go up, but then it will fall steadily all the way somewhere close to 5.5-6% by March 2013. In that case, the RBI can cut much more at peace because the worst of the oil prices are in the inflation numbers. However, let us see what happens on budget day.