Inflation pain easing; 25 bps rate cut likely on Aug 2: BofAML

New Delhi: The Reserve Bank is expected to cut its key policy rate by 25 bps in its review meet on August 2 as June CPI inflation is expected to be around 1.5 per cent, a report says.

According to Bank of America Merrill Lynch (BofAML), an August rate cut will signal banks to go for lowering lending rate before the busy industrial season begins in October.

"We continue to see a 25 bps RBI rate cut call on August 2, with June CPI at 1.5 per cent with daily data showing food inflation falling," BofAML said in a research note.

According to official figures, retail inflation fell to a record low of 2.18 per cent in May while wholesale inflation fell to a five-month low of 2.17 per cent, putting pressure on the RBI to relax interest rate.

The report further said this year monsoon is expected to be good and autumn kharif sowing is also 9.6 per cent higher than last year's. On prices, it said GST rates are unlikely to be inflationary and risk of imported oil inflation is coming down too. All these factors are expected to keep inflation muted.

The Reserve Bank, in its monetary policy review in June, had revised downwards retail inflation forecast for the first half of the fiscal. The RBI has cut its inflation forecast to 2.5-3.5 per cent from 4.5 per cent for the first half and 3.5-4.5 per cent from 5 per cent for the second half.

Moreover, MSP hikes have also been modest, the report said. In the monetary policy review in June, the RBI left key rates unchanged with Governor Urjit Patel noting that the central bank wanted to be more sure inflation will stay subdued.

Despite inflation moderating sharply in April, the Monetary Policy Committee (MPC) decided to leave policy rate unchanged as a "premature action at this stage risks disruptive policy reversals later and the loss of credibility".