New Delhi, Jan 15: Following recent macroeconomic data on Index of Industrial Production (IIP) and trade deficit, Bank of America Merrill-Lynch (BofA-ML) has maintained its stance that the worst is over for the Indian economy.
In a recent report, BofA-ML said that while the November IIP has contracted at (-) 0.1%, the data was well above the bank's estimate of (-)1.5%. "Consumer goods production typically rises in the pre-Diwali month to meet festive demand and falls thereafter. In this case, consumer durables growth, at 1.9%, in particular, held up pretty well," the report said.
The bank remains confident that industrial growth is bottoming. "It will likely bottom out only in H12013 after lending rates soften," the bank added.
Even a high trade deficit of $17.7 billion is driven by a statistically questionable 23.6% jump in oil imports, said Indranil Sen Gupta, India Economist at BofA-ML. "In our view, the commerce ministry is over-estimating oil imports by about 0.5% of GDP. The petroleum ministry has reported April-November oil imports $9.2 billion lower than the commerce ministry. Adjusted for this, the trade deficit is running at last year's level," the report said.
In yet another report, BofA-ML's Sengupta says that with the wholesale-price index (WPI) for the month of December cooling down to 7.2%, the Reserve Bank of India is likely to cut rates by 25 basis points in its monetary policy review on January 29.
"We expect the RBI to cut policy rates by 75 basis points by June with inflation likely to ease to 7% in the March quarter. It should also conduct an OMO by March to improve bank liquidity. This should lead to a 25 basis cut in lending rates by March," the bank opined.
Even though an early diesel price hike may push up inflation by 100 basis points to 8%, the worse would be in the price, the bank said. "This would allow the RBI to steadily cut policy rates through FY14 as inflation will then slip to 5.7% by March 2014," the report added.
