Retail inflation is likely to stay well within the RBI’s 2-6 per cent mandate in the coming months and accordingly, the central bank is expected to cut policy rates by 25 bps on December 6, says a report.
According to Bank of America Merrill Lynch (BofAML), inflationary pressures are expected to remain contained by good rains, low growth and subdued imported inflation amid decrease in global commodity prices.
The global brokerage firm said that after a pause in the October policy review meet, the Reserve Bank is expected to go for a 25 bps cut in key policy rates in its December 6 meet.
BofAML expects inflation to average 4.5 per cent in the first half of 2018 and core inflation is likely to normalise back to 4.7 per cent by March.
“In sum, inflation should stay well within the RBI’s 2-6 per cent mandate. We thus continue to expect the RBI MPC to cut rates by a final 25 bps on December 6,” BofAML said in a research note.
There is, however, a rising risk of a monsoon failure in end-August, which in turn might spike agflation, pushing March CPI inflation to 5 per cent levels and delaying the final RBI rate cut to February, the report said.
Moreover, lower inflation is also expected on the back of weak growth and low ‘imported’ inflation.
Under the new Monetary Policy Framework, the RBI aims to contain inflation at 4 per cent with a band of (+/-) 2 per cent. BofAML oil strategists forecast Brent at USD 49 per barrel in the March quarter. Wholesale inflation rose sharply to 1.88 per cent in July from 0.90 per cent in June 2017, mainly on account of turnaround in prices of food articles, especially vegetables.
Retail inflation jumped to 2.36 per cent in the month, chiefly driven by hardening of prices of sugar and confectionery items, pan, tobacco and intoxicants.
The Reserve Bank in its policy review meet this month has lowered its key lending rate by 0.25 per cent, a move which is likely to translate into lower interest rates for home, auto and other loans as also boost economic activity.