US brokerage Bank of America-Merrill Lynch today said that its sees the first rate cut this fiscal only in March next as inflation is expected to fall only by December-end owing to a decline in commodity prices driven by the US Fed tapering.
“We expect inflation to peak off if the US Fed tapering contains oil and other commodity prices and reduces imported inflation pressures. This should support our call that the RBI will hold till December-end,” BofAML said in a report here.
Accordingly, BofA-ML sees RBI cutting the rates by 50 basis points in March next.
Earlier in the day, the wholesale price-based headline inflation jumped to a three-month high of 5.7 per cent in March on a massive spike in food prices, after falling since December.
BofA-ML said in near-term, the path of CPI inflation, will be determined by rising El Nino risks. For March, it expects CPI inflation to rise to 8.4 per cent against 8.1 per cent last month.
“Although we fancy ourselves relentless hawks, we have been skeptical of the ability of RBI to control inflation in view of imported inflation from QE,” the report said.
Fed stimulus taper
BofA-ML said the withdrawal of QE should help the country through stabilising of commodity prices, even as it did not rule out a round of sell-off in emerging markets in the coming months as Fed tapering gathers pace.
The report forecasts the current account deficit to stabilise to 2.6 per cent in FY’15 and 2.5 per cent in FY’16 if Brent crude stabilises at about $105 a barrel.
Forex reserves
On the forex reserves, it said RBI may recoup the forex kitty to 10 months of import cover by FY’17, which should also help the rupee back on a sustainable appreciation path in the two-three years.
BofA-ML expects the RBI to hold the rupee at 60-65 levels if the dollar trades about 1.30 against the euro.
“Although a favourable May 16 poll results could push the rupee to 57-58 levels, we think it will be difficult to sustain beyond 60,” the report said.