India's inflation woes "overstated": BofAML

Bank of America Merrill Lynch considers India's inflation as comparable to others in the region but is concerned ongoing monetary tightening is counter-productive.

"We believe India's 'inflation problem' is overstated," said Bank of America Merrill Lynch in its Global Economic Weekly report. 

"Adjusted for growth, India's inflation, at 1.3x growth, is no worse than most other BRICs and TIMs. At the same time, India is the only country where monetary tightening to combat inflation has pushed up lending rates to their 2008 peak," it said.

"We continue to differ from conventional wisdom in thinking about India in three ways. First, we do not find India's inflation problem, adjusted for growth, any worse than that of many other emerging markets. Second, we assess that lending rate cuts are far more critical for revival of growth than steps to boost investment. Finally, fiscal and crowding out risks, in our view, are overdone," it added.

"Why has the RBI failed to contain inflation? We believe we are living through a unique asynchronous monetary cycle in which the G-3 is easing and thus limiting the ability of EM central banks, like itself, to control inflation. Also, sharp swings in the weather are impacting food production at a time when easy global liquidity is amplifying the price impact. Not surprisingly, food inflation in India is no worse than that in geographically contiguous countries like Bangladesh and Pakistan," BofAML said.

"We fancy ourselves hawks and were among the first to call for monetary tightening in early 2010. Yet, we cannot but now think that the RBI's tightening is proving counter-productive in dampening growth rather than denting an inflation that is largely supply-side driven. Not surprisingly, RBI's tightening has brought down core inflation (ie, inflation net of agro, oil and metal shocks) to 5-5.5% but it is proving ineffective in controlling headline inflation," it said further.

"We, therefore, call for a 25bp RBI rate cut on 31 July," BofAML predicted.