RBI to pause on Aug 4; 50-bp cut likely in early 2016: BofA-ML

Expects Governor Raghuram Rajan to strike a dovish note to keep the door open for further rate cuts

The Reserve Bank of India (RBI) is likely to maintain status quo on rates in its third bi-monthly policy meet on August 4, taking into account “poor rains” and will go for a 50-basis point rate cut in early 2016, a Bank of America Merrill Lynch (BofA-ML) report said on Monday.

The global financial services major said it was important that Western and Southern India, which grows oilseeds, pulses and raw cotton, gets monsoon rains as this region is slipping into a drought even as overall rains have improved.

“We see cropping at risk if rains do not revive in the next two weeks,” BofA-ML said in a research note adding that “poor rains pose a temporary inflation risk”.

BofA-ML noted that the consumer price index-based retail inflation will fundamentally remain on RBI’s under-six per cent target and the wholesale price index-based inflation may persist in deflation till October.

“We continue to expect the RBI to pause on Tuesday, on poor rains and cut 50 basis points in early 2016. However, we expect Governor Raghuram Rajan to strike a dovish note to keep the door open for further rate cuts if inflation continues to be in control,” the report added.

Meanwhile, DBS in a research note said that “apart from the firmer US dollar, signals from the US Federal Bank will also be important for the Reserve Bank of India’s rate trajectory. If the official commentary signals a start to the US rate hiking cycle later this year, it will affirm our expectations that the RBI will maintain a prolonged pause on the rates front.”

According to official figures, retail inflation rose to an eight-month high of 5.4 per cent in June on costlier food items, fuel, housing, clothing and footwear even as prices of sugar and confectionery items eased during the month.

RBI, which tracks retail inflation as a benchmark for its monetary policy, said earlier last month that price rise was still a worry for the central bank. RBI expects inflation to rise to 6 per cent by January 2016.