The Reserve Bank of India is likely to remain in wait-and-watch mode now, but will eventually need to tighten policy rates to contain upside risks to inflation, an HSBC report said.
According to the global financial services major, inflation may remain sticky, with a possible El Nino effect on the monsoon likely to push up food prices and geopolitical uncertainties seen pumping up global commodity rates.
The RBI may eventually respond by tightening policy rates further to contain upside risks to prices and to bring inflation to 6 per cent or below by early 2016 if it sticks to the Patel Committee's recommended glide path, HSBC said.
The RBI's target is to ease retail inflation, as measured by the Consumer Price Index, to 8 per cent by January 2015 and 6 per cent by January 2016.
Both retail and wholesale price inflation accelerated in March due to rising food prices.
While wholesale inflation rose to a three-month high of 5.7 per cent, retail inflation inched up to 8.31
The RBI had increased the key policy repo rate three times since Raghuram Rajan took over as Governor in September.
"A dry spell this year due to El Nino could push up food inflation. The last time we had poor weather due to El Nino was in 2009 and food inflation averaged 14 per cent then," the global brokerage firm said.
El Nino refers to the warmer-than-average sea surface temperature in the central and eastern tropical Pacific Ocean.
This condition occurs every 4-12 years and had last impacted India's monsoon in 2009, leading to the worst drought in almost four decades.
If food inflation goes back to these levels from 9 per cent presently, it could potentially add up to 2.5 percentage points to headline Consumer Price Index, it added.
The monthly 50 paise increase in diesel prices is set to continue for another year or so, provided international oil prices and the exchange rate are unchanged and the new government does not change fuel price policies.
This will continue to add to costs and inflation pressures.
