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RBI rate cut less likely this year after monsoon estimate cut – BoFA-ML

The Reserve Bank of India is unlikely to cut its key interest rates anytime this year if rains remain deficient, Bank of America Merrill Lynch said in a note. Economists Indranil Sen Gupta and Abhishek Gupta also said retail inflation could decline to 6% by January if monsoon rains remain largely along expected lines.

monsoon

“We see a rising risk that the RBI will push its first repo rate cut to February from December, given that the Met has cut its rainfall forecast to 87% of normal from 93% earlier,” the duo said. “The RBI will not want to take risks with inflation expectations at a time when the war against inflation is almost won. After all, it is not possible to tighten further from current levels without sacrificing hope of a recovery over the next 12 months.”

Besides oil prices, the key factors to watch for would be food price inflation and core inflation, particularly housing and rent costs.

The economists noted that house prices and rent costs are on a declining trend. “Housing price inflation has decelerated to 8.9% from 10.6% a year ago. Our survey suggests that most cities are seeing much lower housing price inflation (Chart 3). If housing price inflation is taken at 5%, core CPI inflation will ease to 6.5% from 7.4%.”

However, the key factor would continue to be food prices, and rains.

“Normal rains hold the key to the RBI’s 6% January 2016 target. A 5% swing in agro prices impacts CPI inflation by about 250bp,” they said.

The prices of agricultural commodities and food items have been rising by double digits in recent years.

bofa

“It could decelerate to 7.5% levels in case of normal rains in 2015, even after accounting for 10% hike in rice and wheat prices,” they said, adding that the proposed implementation of the Swaminathan formula, that would push up minimup support price for grains, could push up prices of rice and wheat in coming years.”

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