Rains support RBI rate cut, may douse agflation : BoA-ML

New Delhi: The Reserve Bank is expected to cut key interest rate by 25 basis points at its policy review meet next month if prices of pulses fall and help push down agflation, a BoA-ML report said on Monday, even as it sees overall retail inflation in July to touch 6 percent.

According to the global financial services major, normal rains are pushing up sowing and river waters would douse agricultural inflation (agflation) going forward.

"We continue to expect the RBI to cut 25 bps on August 9 if good rains push up pulses cropping and dampen pulses price inflation," said the Bank of America-Merrill Lynch report.

It said however that retail inflation, based on Consumer Price Index, is seen at 6 percent - higher than the RBI's 5 per cent in March 2017 target - because of a poor summer rabi crop.

"As monetary policy should surely be forward looking, we expect the RBI to factor in the fact that a good monsoon would damp pulses prices," it said, adding that food prices are peaking off.

Monsoon rainfall is running at 100 percent of normal so far, much better than last year's 86 percent and sowing has picked up to 103.3 percent of last year.

Pulses cropping has jumped to 39.4 percent above 2015 levels so far. Moreover, rains have also pumped up river waters to 4.6 per cent above their 10-year average from below 20 per cent, the report said.

BoA-ML has cut March 2017 CPI inflation estimates to 5.1 percent from 5.7 percent on good rains. The June Core CPI inflation has actually slipped to 4.8 per cent with high rates hurting growth and constricting pricing power.

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 Wholesale Price 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.