Normal rains to prop rural India; RBI likely to cut rates by 25 bps in August: BofAML

Bank of Americal Merrill Lynch has said that India's monsoon will revive the rural demand which in turn will allow the RBI to cut rates by 25 basis points in August this year.

Bank of Amercia Merrill Lynch (BofAML) has said that a normal monsoon this year will revive the rural demand whereby will allow the Reserve Bank of India (RBI) to cut rates by 25 basis points in August.

According to the global financial services major, rural demand is already reviving and the autumn kharif farm income has jumped by 26% last year.

The coming rabi wheat harvest in May should also push up farmer income by a good 13%, BofAML said in a research note adding if rains are indeed normal, CPI inflation in the first half of this year should average a benign 4%.

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"With growth running at 4.5-5% in the old GDP series, well beyond our estimated 7% potential/trend, there is surely little chance of demand-led inflation. This, in turn, supports our call of a 25 bps RBI rate cut in August," it said.

The Reserve Bank, in its monetary policy review meet on April 6, kept the repurchase or repo rate -- at which it lends to banks -- unchanged at 6.25% but increased reverse repo rate to 6% from 5.75%.

The next bi-monthly policy review meeting of the Reserve Bank is in June.

According to BofAML, inflation risks are overdone. On one hand weak growth continues to curb pricing power and food inflation is coming off and on the other hand, though El Nino is a risk, the RBI has itself highlighted the importance of supply management as a policy response.

Moreover, BofAML commodity strategists expect commodity prices to stabilise in 2017, reducing the pressure on imported inflation by the first quarter of 2018.

In an earlier report, BofAML had said that potential imported oil/commodity price inflation is expected to cool in 2017. "Our commodity strategists expect Brent to recover at US dollar 61/bbl in 2017 after falling to US dollar 44/bbl in 2016 from US dollar 52/bbl in 2015," it had said.

This should cool dated Brent price inflation (and WPI) to 10-15% in the first quarter of 2018 from current 50% levels, it added.

The global brokerage firm further said that investors should focus on consumption driven sectors.

"We grow more confident of our standing call that investors should play consumption over investment after the Met forecast a normal southwest monsoon," it said.