RBI to cut rates in August review despite inflation: BOFA-ML

Mumbai: A day after data showed a spike in headline inflation for April, foreign brokerage Bank of America Merrill Lynch on Friday said it continues to expect a rate cut by RBI in its August policy.

"We would not react too much into higher-than-expected inflation," it said.

According to BOFA-ML, the 5.4 percent reading is just a notch above its estimate of 5.3 percent.

A poor rabi or winter crop could sustain inflation at 5-5.5 per cent till June, and it may go below 5 percent after that if oil prices cool down to USD 39 per barrel, it said.

This will make it possible for Reserve Bank of India Governor Raghuram Rajan to announce a 0.25 percent rate cut in the August 9 policy announcement, it said.

The next bi-monthly policy announcement by RBI is scheduled on June 7.

In a double whammy to the economy, industrial output growth plunged to 0.1 percent in March, while retail inflation soared to 5.39 percent in April, which might spoil the chances for any immediate rate cut by the apex bank.

The factory output growth decelerated mainly due to poor performance of manufacturing and mining sectors coupled with contraction in capital goods production, while rising food prices pushed inflation higher, reversing the recent downward trend.

Terming the factory growth number as "volatile", BOFA-ML said it was a surprise as it came against an expectation of 2.6 percent.

It said apart from the rate cut, the RBI should also increase liquidity supply in the market which will ensure a lending rate cut of 0.50 percent for the borrowers by September.