The brokerage expects RBI Governor Raghuram Rajan to stick to the dovish April commentary and cut interest rate by 25bps in August depending on how monsoon pans out. Â Rate cut in August could put brakes on monetary policy easing, it says.
Bank of America-Merill Lynch (BofA-ML) expects the Reserve Bank of India (RBI) to reiterate its dovish April commentary and pause on rates on Tuesday. It is betting on a ‘final’ 25 basis point cut on August 9 subject to a normal monsoon.
“In our view, the RBI policy will reiterate April's relatively dovish policy stance of watching macroeconomic and financial developments in the months ahead with a view to responding with monetary action as space opens up,” the brokerage said in a note.
“Assuming normal rains the India Met predicts, we expect the RBI to cut 25 bps on August 9 as we see no reason to delay further. Beyond this, however, we see little headroom for further easing,” it added.
BofA-ML noted that the RBI repo rate, at 6.5 percent is already running below the medium-term CPI inflation, at 6.9 percent, implying savers were getting a 'real' rate of return.
It added that the seasonal drop in crude prices in September to an expected USD 39 per barrel should help contain headline CPI inflation in the months ahead. It expects that “the May CPI inflation should print higher at 5.7 percent on June 13 on a poor rabi crop.”
An expected RBI open market operation is likely to push money markets to a seasonal surplus by June-end, Bofa-ML said on Monday. “This should lead to lending rate cuts of 50 basis points by September,” it said.
The brokerage also said that if a rate hike by the US Federal Reserve in September, as expected by the street, stalls portfolio inflows, the RBI may even roll over the FCNR scheme.The Great Diwali Discount!
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