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RBI to cut rates by 25 bps in August due to peak in inflation

With inflation peaking off, the Reserve Bank of India will be cutting down the rates by 25 bps in August if the monsoon turns out to be normal. The inflation risks are overdone if the Global Financial Services major Bank of America Merrill Lynch is to be believed. In January, the inflation was at 5.1 percent while in December it was at 5.2 percent and the according to the tracking of Bank of America Merrill Lynch (BofAML), the inflation rate is going to rise to 4.7 percent in February with the prices of tomato as well as onion going out of hand. The RBI MPC is expected to look through the jump in the inflation rate in April-June to 5.4 percent. As a backup, RBI MPC will be cutting down the rates by 25 bps in August if La Nina materializes.

While the budget of 2018 has increased the minimum support prices, the inflationary impact of it is going to be muted since the ruling wholesale prices are higher than the revised MSP already. It is being estimated that there will be an average inflation at 4.8 percent in the financial year 2019 within the 2-6 percent inflation target of RBI. The Reserve Bank of India has also kept the policy rate unchanged at 6 percent for the third time consecutively on 7th February as a measure of the firming inflation.

RBI said that it is expecting the retail inflation to rise to 5.1 percent in the last quarter of the current fiscal year because of the rise in the crude oil prices and the increase in the salary components of the government employees. Inflation in the range of 5.1 percent to 5.6 percent has been projected by the Central Bank in the first half of 2018-2019.