Monsoon augurs well for rural demand, RBI rate cut, says BofAML

RBI has cut its inflation forecast to 2.5-3.5% from 4.5% in first half of this fiscal

The prospering monsoon signals revival of rural demand and a rate cut by the Reserve Bank on August 2 amid low inflationary pressures, says a report.

According to Bank of America Merrill Lynch (BofAML), good rains support the case for a 25 bps RBI rate cut on August 2 and June CPI is expected to slip below 2 per cent with food prices still falling.

The report noted that rains are 10 per cent above normal till mid-June, and this, in turn, has pushed up autumn kharif sowing by 6 per cent over last year.

"Good rains should revive rural demand, with MSP hikes, farm loan waivers and interest rate subventions before 2019 polls," the report noted.

The global financial services major noted that if rains are indeed normal, CPI inflation in the first half of the fiscal should average a benign 3 per cent.

"Daily data show food inflation is falling further in June on a good summer rabi harvest. This should pull June inflation below 2 per cent from 2.2 per cent in May," the report noted.

The RBI has cut its inflation forecast to 2.5-3.5 per cent from 4.5 per cent in the first half of this fiscal and 3.5-4.5 per cent from 5 per cent in the second half.

In the monetary policy review on June 7, the RBI left key rates unchanged with Governor Urjit Patel noting that the central bank wanted to be more sure that inflation will stay subdued.

Despite inflation moderating sharply in April, the Monetary Policy Committee (MPC) decided to leave policy rates unchanged as a "premature action at this stage risks disruptive policy reversals later and the loss of credibility".