With inflation set to fall only by December, 2014, the first rate cut this fiscal is expected only in March, according to the US brokerage Bank of America-Merrill Lynch (BofA-ML).
It added that commodity prices may dip by the end of the year driven by the US Fed tapering which will urge the central bank to revise rates at least by about 50 basis next March.
Wholesale price-based headline inflation has moved to a three-month high of 5.7 per cent in March on a massive surge in food prices.
“We expect inflation to peak if the US Fed tapering contains oil and other commodity prices and reduces imported inflation pressures. This should support outcall that the Reserve Bank would hold till December end,” said BofA-ML.
As per the brokerage, in near-term, the path of consumer price inflation will be determined by rising El Nino risks.
For March, BofA-ML hopes CPI inflation to rise to 8.4 per cent as against 8.1 per cent last month.
“Though we fancy ourselves relentless hawks, we have been sceptical of RBI’s ability to control inflation in view of imported inflation from QE,” the report said.
It added that the current account deficit may stabilise at 2.6 per cent in FY15 and 2.5 per cent in FY16 if the Brent crude stabilises at about $105 a barrel.
On the forex reserves, the Reserve Bank may recoup the forex kitty to 10 months of import cover by FY17, which should also help the rupee back on a sustainable appreciation path in the two-three years.
BofA-ML expects the Reserve Bank of India to hold rupee at 60-65 levels if the dollar trades about 1.30 against the euro.
“Though a favourable poll result could push the rupee to 57-58 levels, it will be difficult to sustain beyond 60,” the report said.
“Although we fancy ourselves relentless hawks, we have been skeptical of the ability of Reserve Bank to control inflation in view of imported inflation from QE,” the report said.
BofA-ML said the withdrawal of the 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.
Earlier in the day, wholesale price-based headline inflation jumped to 3-month high of 5.7% in March on a spike in food prices, after falling since December. (With agency inputs)