RBI to cut rates if rains dampen pulses prices: BofA report

Moneycontrol BureauThe Reserve Bank of India is most likely to cut down its key policy rate on August 9 by 25 basis points if the rains manage to dampen pulse prices, says a BofA Merrill Lynch Global Research report. This, the report says, will bring down the CPI (Consumer Price Index) inflation down to the 5 percent target set for March 2017 from June 2016' 5.8 percent. There has been a 27 percent increase in pulse price in the country owing to the 11 percent decline in production due to poor rains in the last two years. A 5 percent inflation in pulses alters the CPI inflation by 12 basis points.Owing to the poor summer rabi crop, the report forcasts the CPI inflation to be around 6 percent. After which it will slowly witness a decline. The report expects around 20 percent increase in pulse production in 2017, with 15 percent rise in rabi production and 30 percent from kharif. The report also estimates "ex ante FY17 pulses demand at 25.7 million tonnes assuming a broadly 2 percent growth (1.2 percent population growth + 0.8 percent increase in nutritional intake) since 2013-14's domestic use of 23.4 million tonnes." This should bridge the negative supply-demand gap of an estimated 2.7 million tonnes and 2.3 million tonnes seen in 2015 and 2016, respectively.So even though the CPI inflation for June stood at 5.8 percent, BofA Merrill Lynch predicts there will be a decision from the RBI to cut rates by 25 basis points. The good rainfall seen in the country has led it to cut down its March 2017 CPI inflation forcast to 5.1 percent from its previous 5.7 percent. This is in line with RBI's 5 percent target for the month.It further reasons that, "June core-CPI inflation has softened to 4.8 percent from 5 percent last month with poor growth curtailing pricing power." Another major reason for its expectation from RBI to cut rates is due to the constrain in the industrial growth in May. This is attributed to the prevalent high rates of lending.