Notwithstanding the significant jump in consumer price inflation, the Reserve Bank of India is expected to cut key policy rates by 25 basis points in its policy review meet on October 4, as good monsoon is likely to damp inflationary pressures, says a report.
According global financial services major, Bank of America Merrill Lynch (BofA-ML), the CPI inflation print was broadly in line with its above consensus 6 per cent forecast.
Consumer prices (CPI inflation) rose 6.07 per cent in July, the fastest pace in nearly two years, and it is expected that the implementation of new Goods and Services Tax (GST) may push up inflation further.
“We expect the RBI to cut 25 bps on October 4, to signal to banks to cut lending rates just before the October-March busy season sets in,” BofA-ML said in a research note, adding that the scope for further RBI rate cut is “limited”.
RBI on August 9, left interest rates unchanged in his last monetary policy review as inflation hit near 2-year high but said the central banks stance remains “accommodative”.
BofA-ML expects CPI inflation to ease to 5.1 per cent by March close to the 5 per cent RBI target, as good monsoon douse agflation from 6.1 per cent in July.
In accordance with a monetary policy framework agreement it had entered into with RBI in February last year, government earlier this month notified consumer price inflation target of 4 per cent for the next five years, with an upper tolerance level of 6 per cent and lower limit of 2 per cent.
The next monetary policy on October 4 is likely to be decided by a six-member interest rate setting panel, instead of the present practice of RBI governor deciding the interest rate. (PTI)