Normal rains to prop rural India; RBI rate cut on cards: BofAML

New Delhi: A normal monsoon this year should continue to revive rural demand and allow the RBI to cut rates by 0.25 percent in August, says a Bank of America Merrill Lynch report.

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

The coming rabi wheat harvest in May should also push up farmer income by a good 13 percent, 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 percent.

"With growth running at 4.5-5 percent in the old GDP series, well beyond our estimated 7 percent 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 percent but increased reverse repo rate to 6 per cent from 5.75 percent.

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 USD 61/bbl in 2017 after falling to USD 44/bbl in 2016 from USD 52/bbl in 2015," it had said.

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