BofA-ML sees RBI slashing rates by 25 bps in Aug review

The Reserve Bank is likely to cut repo rate by 25 basis points in the August policy as growth is likely to remain weak and inflation to be softer this year, says brokerage Bank of America Merrill Lynch (BofA-ML) in a report.
"Recovery remains shallow with old GDP growth, at 4.9 per cent in FY2016 and 5.8 per cent in FY2017, well below our 7-7.5 per cent potential. Secondly, inflation, at 5-6 per cent, remains benign, especially with a good monsoon likely to douse agflation and oil prices likely to slip to USD 39 a barrel by September," BofA-ML attributed the reasons in the report which could trigger rate cut in August 9 policy review.

It can be noted that citing rising inflationary pressure, the RBI had left key policy rates unchanged at yesterday's policy review, but sounded accommodative provided the April reading of CPI inflation was an aberration.
The Wall Street brokerage expects CPI inflation for May at 5.7 per cent, which will be out on June 13.
The report said that an RBI rate cut will signal lending rate cuts if RBI open market operations pushes money markets into seasonal surplus by June. "This should lead to lending rate cuts of 50 bps by September before the busy industrial season commences," it said.

The report estimates that the RBI will need to inject USD 49 billion or Rs 3,30,000 crore of durable liquidity in the current fiscal year.
As a result, the loan market will likely see potential excess supply of 17.1 per cent for the first time since 2013, the report said.
For the FCNR-B deposits, which start maturing in September, RBI will sell foreign exchange reserves to fund FCNR maturity outflows, the report said, adding if the Fed hike stalls flows, the report expects the RBI to roll over, it added.