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Inflationary pressures will remain elevated in FY'15 and come off gradually in FY'16, said a report by Goldman Sachs economists Tushar Poddar and Vishal Vaibhaw.
Drawing attention to the possible impact of El Nino, they assume a rain deficit of between 5 and 10 per cent. This, they said, can increase food prices by 110 bps and add 50 bps to headline CPI inflation in this fiscal. Its forecast for CPI is 8 per cent in FY'15.
Goldman Sachs expects the Reserve Bank to raise policy rates by 50 bps in the second half of 2014.
Pointing out that the RBI has de facto moved to an inflation target with a ‘glide path’ of 8 per cent by January 2015, and 6 per cent by January 2016, they think that to buttress credibility, it is more likely to hike again than remain on hold.
If a poor monsoon puts upward pressures on food prices, then that would strengthen the case for the RBI to act to reduce inflationary expectations and prevent second round effects, the report said.
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