Retail Inflation seen at 5% in March; RBI to cut rates by 25%: Report

Raghuram Rajan on Feb 2, left key interest rate unchanged citing inflation risks and growth concerns

India's retail inflation for March is expected to be around 5% and the Reserve Bank is likely to cut its key rate by 25 basis points each at its policy reviews on April 5 as well as in August, says a report.

According to Bank of America Merrill Lynch (BofA-ML), its inflation indicator is tracking March CPI inflation at 5%, slightly lower than February's 5.2%.

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"We continue to expect the RBI to cut rates 25 bps on April 5 and in August," BofA-ML said in a research note.

The declining inflation and negative industrial outlook have strengthened the case for RBI cutting interest rate in its first bi-monthly monetary policy for 2016-17 on April 5.

RBI Governor Raghuram Rajan on February 2, left the key interest rate unchanged citing inflation risks and growth concerns.

Rajan had said on March 12 that government sticking to fiscal consolidation roadmap of reducing deficit to 3.5% of the GDP in 2016-17 was comforting. On how that would feed into monetary policy, he had said "wait and see".

The global brokerage major's equity strategists expect earnings to grow about 5% in FY16 from 2% in April-December.

"This will also set the direction for FPI equity flows and INR. A mix of earnings recovery and dovish Fed could, for example, allow the RBI to push INR to Rs 65/dollar levels," it said.

The report further noted that the summer polls are likely to cloud GST legislation.

"The budget session will reconvene on April 25 and go on until May 13. Given the summer polls start on April 4, with results on May 19, it remains to be seen if the GST Bill can be passed," BofA-ML said.

Assam goes to polls on April 4, West Bengal from April 4 to May 5, and Kerala and Tamil Nadu on May 16.