Rains key to further RBI rate cut: BofA-ML

Says poor rains pose a temporary 250 basis points inflation risk

The possibility of a rate cut by Reserve Bank of India in its August 4 policy meet is "fading", unless rains resume "convincingly" in central and western India next week, a Bank of America Merrill Lynch report says.

According to the global financial services major, rains are critical in sowing months of July-August and the ongoing dry spell in central and western India, which grows oilseeds, pulses and raw cotton, is worrisome.

"We worry about the dry spell since late June as the bulk of the cropping takes place in July and August," BofA-ML said, adding that "rains have slipped to 92% of normal from 116% in June".

According to the global brokerage firm, poor rains pose a temporary 250 basis points inflation risk.

"Even if the Fed is none-too hawkish on July 29, the possibility of an August 4 RBI cut is fading unless rains resume really convincingly in central and western India next week," Bank of America Merrill Lynch's Chief Economist Indranil Sen Gupta said in a research note.

The research note further added that the Modi government would not use the RBI against "rain shock".

"We do not expect the Modi government to use the RBI to fight inflation from a rain shock. It will likely respond with supply management measures like the previous NDA government did during the 2003 drought," BofA-ML said.

It further added that a rate cut cannot compensate for crop damage and only ends up hurting growth at a time of rural stress.

In June 2 policy review, RBI had cut repo rate by 0.25% for the third time this year to spur investment and growth, but hinted that there may not be any more cuts in the near term.

RBI had cut the repo rate (short-term lending rate) from 7.5% to 7.25% in June, but left all other policy tools such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged at 4% and 21.5%, respectively.