Inflationary pressure is likely to remain in check due to low, sub-potential growth and CPI forecast should average 5% in the fiscal, in line with the Reserve Bank's target, says a report. Global financial services major Bank of America Merrill Lynch (BofA-ML) revised its fiscal 2016-17 CPI inflation forecast to 5.7% in March 2017 from 5.5% earlier assuming oil at USD 55 per barrel, saying the average CPI inflation forecast should drop to 5%, in line with RBI's 5% fiscal 2016-17 target.
The report noted that the scope for further RBI rate cuts is "limited" as the repo rate at 6.25% would be well below the 6.9% historical average CPI inflation. According to the firm, inflation roadmap for this year supports a rate cut by RBI in its policy review meet on August 9. "We continue to expect RBI to cut a final 25 bps on August 9 with core CPI inflation expected to remain benign at 5%," BofA-ML said.
WPI would end the financial year at a lower 4.9%. "If Brent stays at current levels, WPI inflation works out to be 3.8%. Core WPI inflation will likely remain soft at 3.3%," it added. Three swing factors for headline inflation in this fiscal year are -- rains, seventh pay commission and oil.
Earlier this month, RBI reduced its policy rate by 0.25% to 6.5% -- its lowest level in more than five years. While this was the first rate cut after a gap of six months, RBI has lowered its lending rate by 1.5% cumulatively since January last year. However, the industry still wants further rate cuts from RBI to boost growth.