RBI can cut rates by 25 bps on Aug 9 if rains damp pulse price: BofA-ML

The Reserve Bank of India (RBI) is expected to cut key interest rates by 25 basis points in its policy review meet on August 9, if good rains damp pulse price inflation, says a Bank of America Merrill Lynch (BofA-ML) report.

Pulses inflation is running at 27% on a poor summer rabi crop.

"With good rains, pulses' sowing for the kharif season has jumped 39% above last year's sowing. This should pull down pulses prices by 20% and cool CPI (consumer price index) inflation to 5.1% by March," BofA-ML said in a research note.

According to the global brokerage firm, the RBI could slash policy rates because, a good monsoon would douse inflation, June core-CPI inflation has softened; and high lending rates continue to constrain May industrial growth.

"If good rains damp pulses prices inflation, as we expect, the CPI inflation should be well on track to the RBI's 5% March 2017 target," the report noted.

BofA-ML has cut its March the CPI inflation forecast to 5.1% from 5.7%, in line with the RBI's 5% target, with rains likely to pull down pulses prices. Rains are currently running a surplus of 102% of normal.

Meanwhile, the wholesale price index (WPI) inflation accelerated for the third straight month in June hitting 1.62% on costlier food and manufactured items.

The hardening of the WPI index follows an uptick in retail inflation, which hit a 22-month high of 5.77% in June.

In the June policy review meet, the RBI Governor Raghuram Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.