Three reasons why Raghuram Rajan should consider rate hike in August
Given the accommodative stance of Reserve Bank of India's June policy review, global brokerage Bank of America-Merrill Lynch (BofA-ML) expects the central bank to reduce interest rates by 25 basis points in its third bi-monthly monetary policy to be announced on August 09.
- Jun 8, 2016,
- Updated Jun 8, 2016 4:00 PM IST
Given the accommodative stance of Reserve Bank of India's June policy review, global brokerage Bank of America-Merrill Lynch (BofA-ML) expects the central bank to reduce interest rates by 25 basis points in its third bi-monthly monetary policy to be announced on August 09.
"We grow more confident of our August 9 25 bps RBI rate cut call after Tuesday's dovish policy as RBI governor Raghuram Rajan reiterated that the stance of monetary policy remains accommodative and that he will monitor macroeconomic and financial developments for any further scope for policy action," said BofA-ML in a research note.
Below are the three catalysts that BofA believes should lead to the rate cut:
Shallow recovery cries for RBI easing
The brokerage said that the GDP growth based on old methodology remained weak at 4.9 per cent in the fiscal year 2016 and 5.8 per cent in FY17 (BofA-ML e). This stands well below the potential of 7-7.5 per cent that the country may achieve.
On account of weak growth, the March quarter profits for the BSE Sensex firms came in at 8 per cent against 12 per cent that the brokerage expected. This shallow recovery in the earnings calls for a rate cut by RBI.
Inflation under control
The brokerage expects consumer price index (CPI) inflation to rule at a soft 5-6 per cent in FY17. It also expected that a good monsoon will douse agflation.
BofA-ML estimates the May CPI inflation to come in at 5.7 per cent. However, it added the RBI will look through the increase in inflation due to the 137 per cent hike in housing rent allowance recommended by the 7th Pay Commission.
It expects the RBI to assess the inflation impact after taking into account the still-low oil price level as well.
Lending rate cuts
An RBI rate cut will signal lending rate cuts if RBI OMO pushes money markets into seasonal surplus by June. This may lead to lending rate cuts of 50 bps by September before the busy industrial season commences.
"It is estimated that the RBI will need to inject Rs 3300 billion of durable liquidity in FY17. As a result, the loan market will likely see potential excess supply of 17.1 per cent for the first time since 2013," said BofA-ML.
Given the accommodative stance of Reserve Bank of India's June policy review, global brokerage Bank of America-Merrill Lynch (BofA-ML) expects the central bank to reduce interest rates by 25 basis points in its third bi-monthly monetary policy to be announced on August 09.
"We grow more confident of our August 9 25 bps RBI rate cut call after Tuesday's dovish policy as RBI governor Raghuram Rajan reiterated that the stance of monetary policy remains accommodative and that he will monitor macroeconomic and financial developments for any further scope for policy action," said BofA-ML in a research note.
Below are the three catalysts that BofA believes should lead to the rate cut:
Shallow recovery cries for RBI easing
The brokerage said that the GDP growth based on old methodology remained weak at 4.9 per cent in the fiscal year 2016 and 5.8 per cent in FY17 (BofA-ML e). This stands well below the potential of 7-7.5 per cent that the country may achieve.
On account of weak growth, the March quarter profits for the BSE Sensex firms came in at 8 per cent against 12 per cent that the brokerage expected. This shallow recovery in the earnings calls for a rate cut by RBI.
Inflation under control
The brokerage expects consumer price index (CPI) inflation to rule at a soft 5-6 per cent in FY17. It also expected that a good monsoon will douse agflation.
BofA-ML estimates the May CPI inflation to come in at 5.7 per cent. However, it added the RBI will look through the increase in inflation due to the 137 per cent hike in housing rent allowance recommended by the 7th Pay Commission.
It expects the RBI to assess the inflation impact after taking into account the still-low oil price level as well.
Lending rate cuts
An RBI rate cut will signal lending rate cuts if RBI OMO pushes money markets into seasonal surplus by June. This may lead to lending rate cuts of 50 bps by September before the busy industrial season commences.
"It is estimated that the RBI will need to inject Rs 3300 billion of durable liquidity in FY17. As a result, the loan market will likely see potential excess supply of 17.1 per cent for the first time since 2013," said BofA-ML.