Inflation fears overdone; rate cut likely in Aug: Report

Inflation risks are overdone, and the Reserve Bank is expected to go for a rate cut in August, even as it may strike a "balanced tone" in the ensuing policy review meet next month, says a report.

According to Bank of America Merrill Lynch (BofAML), inflation risks are overdone and March inflation is likely at 4.2 per cent, down from December's 5.2 per cent and well within RBI's 2-6 per cent mandate.

The CPI inflation fell to a 4 month low of 4.44 per cent in February. RBI takes into account retail inflation while formulating monetary policy.

The report said a normal monsoon is expected to contain agflation. Besides, the MSP hike in Budget 2018, will have limited inflation impact as the revised MSPs are below the market price for many kharif crops.

"We grow more confident of our call that inflation risks are overdone," the report said. Moreover, there is a good possibility of a normal monsoon dousing agflation in the second half of 2018.

The central bank's next monetary policy review is scheduled for April 5. It had kept the policy rate unchanged in the February meeting on fears of inflation.

"We expect the RBI MPC to strike a balanced tone on April 5, with March quarter inflation set to average 4.6 per cent, 50 bps below their 5.1 per cent forecast. This backs our call of a final 25 bps cut in August if rains are normal," the report noted.