Fears of RBI rate hike overdone; 25 bps cut likely in Aug

New Delhi: Fears of the Reserve Bank going for a “rate hike” are overdone and there is still room for a 25 bps rate cut in the August monetary policy review, provided rains are normal, says a report.
Global financial services major Bank of America Merrill Lynch (BofAML), termed the latest RBI policy as “balanced” and said that macro risks are getting overdone in the government securities (G-sec) market.
In its 6th and the last bi-monthly monetary policy review of the current fiscal, 2017-18, RBI on Wednesday kept interest rates unchanged for the third time in a row saying that higher government spending would accelerate inflation, and warned of risks from wider fiscal deficit.
“We continue to think that market concerns of a rate hike are overdone after the conference calls shed more light on the bias, which seemed soft,” BofAML said in a research note adding that “we still expect a 25 bps August RBI rate cut”.
The Reserve Bank did not go in for a hike in key rates, despite expecting a surge in inflation going forward, as the price rise is being driven by higher house rent allowance (HRA) to government employees, Governor Urjit Patel had said.
Nearly 0.35 per cent of current inflation is due to the HRA hikes as per the 7th pay panel recommendations, he said. BofAML expects January CPI inflation at 4.9 per cent down from 5.2 per cent in December.
The RBI has upped its inflation forecast to 5.1 per cent for the current fourth quarter of the 2017-18 fiscal ending March 31. It expects inflation to firm up further to 5.1-5.6 per cent in first half of the next fiscal, before cooling down to 4.5-4.6 per cent in the second half.
The report however, noted that core inflation (excluding food, fuel and HRA) is already hovering about a reasonable 4.2 per cent.
“We continue to expect the RBI to cut rates by 25 bps in August if we see normal rains,” it added.