New Delhi: The Reserve Bank 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 percent on a poor summer rabi crop.
"With good rains, pulses' sowing for the kharif season has jumped 39 per cent above last year's sowing. This should pull down pulses prices by 20 percent and cool CPI inflation to 5.1 percent by March," BofA-ML said in a research note.
According to the global brokerage firm, the Reserve Bank could slash policy rates for three reasons - first a good monsoon would douse agflation; second, June core-CPI inflation has softened; and finally, high lending rates continue to constrain May industrial growth.
"If good rains damp pulses prices inflation, as we expect, CPI inflation should be well on track to the RBI's 5 percent March 2017 target," the report noted.
BofA-ML has cut its March CPI inflation forecast to 5.1 percent from 5.7 percent, in line with the RBI's 5 percent target, with rains likely to pull down pulses prices. Rains are currently running a surplus of 102 percent of normal.
Meanwhile, the wholesale inflation accelerated for the third straight month in June hitting 1.62 percent 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 percent in June.
In the June policy review meet, 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.