India: Normal rains to prop rural India; RBI rate cut on cards: BofAML – 19 Apr 2017

  • A normal monsoon in 2017 should continue to revive rural demand and allow the RBI to cut rates by 25 bps in Aug 17, 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% in 2016.
  • The coming rabi wheat harvest in May 17 should also push up farmer income by a good 13%, BofAML said in a research note adding if rains are indeed normal, CPI inflation in 1H17 should average a benign 4%.
  • The Reserve Bank, in its monetary policy review meet on 6 Apr 17, kept the repurchase or repo rate unchanged at 6.25% but increased reverse repo rate to 6% from 5.75%.
  • 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 1Q18.
  • In an earlier report, BofAML had said that potential imported oil/commodity price inflation is expected to cool in 2017. Commodity strategists expect Brent to recover at USD61/bbl in 2017 after falling to USD44/bbl in 2016 from USD52/bbl in 2015.
  • This should cool dated Brent price inflation (and WPI) to 10-15% in 1Q18 from current 50% levels, it added.
  • The global brokerage firm further said that investors should focus on consumption driven sectors.

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