BofA Sees August India Rate Cut as Monsoon to Damp Food Prices

  • Pickup in rains this month has sparked a rally in bonds
  • June consumer inflation was the highest since August 2014

Bank of America Merrill Lynch is sticking to its call for an interest-rate cut in India next month even after consumer prices rose at the fastest pace in almost two years.

“A good monsoon should douse agflation,” Mumbai-based BofAML economist Indranil Sen Gupta wrote in a report, adding that the recent “overshoot” in costs is “largely driven” by 27 percent pulses-price inflation as production dropped about 11 percent over the past two years due to poor rains. He expects the Reserve Bank of India to lower the benchmark repurchase rate by 25 basis points at the August 9 policy review.

A pickup in monsoon rains this month has spurred optimism that better crop output will help contain food costs, which have a significant bearing on overall inflation. That’s sparked a rally in sovereign bonds. India is the world’s biggest producer and consumer of pulses and prices of beans, chickpeas and lentils as a group have risen between 20 percent and 40 percent each month for the past year.

The June-September seasonal showers, which affect both summer and winter sowing, are predicted this year to be the highest in 22 years after back-to-back droughts. Consumer prices rose 5.77 percent in June from a year earlier, the fastest pace in 22 months.

“We have cut our March CPI inflation forecast to 5.1 percent from 5.7 percent, in line with the RBI’s 5 percent target, with rains likely to pull down pulses prices,” Gupta wrote. “We expect pulses prices to ease by 20 percent this year.”

The yield on government notes due January 2026 has slumped 19 basis points this month. It fell one basis point on Thursday to end at 7.26 percent, the lowest close for a benchmark 10-year security since June 2013. Yields on shorter-maturity debt have fallen more. The rupee was steady at 67.1775 per dollar.

RBI Governor Raghuram Rajan, whose term ends early September, last reduced the repo rate in April to a five-year low of 6.50 percent. Speculation that his successor, who is yet to be named, will be more dovish has contributed to the rally in bonds.

The benchmark rate will stay unchanged until Sept. 30, before dropping to 6.25 percent next quarter, according to the median estimate in a Bloomberg survey at the end of June.

Before it's here, it's on the Bloomberg Terminal.