RBI may be dovish tomorrow, cut rate in Aug if there's good monsoon: BofAML

No material risk of second-round inflation effects from HRA hikes by the 7th Pay Commision

The RBI's Monetary Policy Committee is expected to maintain a dovish stance tomorrow, but might go for a 25 bps slash in repo rate in August on good monsoon, says a BofAML report.

The global financial services major said high price risks on the retail front are moderating and CPI-based inflation is expected to be around 3 per cent in the first half of this financial year as food prices are falling and El Nino risks also receding.

Bank of America Merrill Lynch (BofAML) expects May CPI inflation at about 2.5 per cent, with daily data showing food prices continuing to fall even in June on a good summer rabi harvest.

Moreover, there is expected to be no material risk of second-round inflation effects from the house rent allowance (HRA) hikes by the 7th Pay Commission as the first round effect itself was mostly statistical.

"We grow more confident of our contrarian call of a 25 bps RBI rate cut on August 2 as the just announced Goods and Services Tax (GST) rates are unlikely to be inflationary," it said.

BofAML expects the RBI MPC to look through any inflationary/ deflationary impact of GST rates as a one-off adjustment.

The Reserve Bank in its monetary policy review meet on April 6 kept the repo rate -- at which it lends to banks -- unchanged at 6.25 per cent, but increased reverse repo rate to 6 per cent from 5.75 per cent.

The report further noted that if the RBI cuts rate on August 2, it will signal a lending rate cut to banks before the busy industrial season in October.