Inflation is set to rise further towards the second half of the fiscal, and could average 5.1 per cent this financial year compared to 3.6 per cent last year, says an HSBC report.
According to the global financial services major, the factors that are likely to impact inflation going forward include higher oil prices, a weaker rupee, higher MSPs and more currency in circulation.
Given global factors like rise in oil prices, Fed rate hikes and likely fall in USD liquidity, will impact India's macro economy, while domestic factors like higher agriculture Minimum Support Prices (MSPs) threaten to raise inflation.
"We believe it could average 5.1 per cent in 2018-19, compared to 3.6 per cent last year," HSBC said in a research note.
The report further noted that "with appropriate action now, it is likely to inch lower in 2019-20, and even fall back towards the RBI's 4 per cent target by the second half of 2019-20".
Reversing the declining trend of three months, retail inflation inched up to 4.58 per cent in April and may prompt the Reserve Bank to harden stance at the monetary policy review next month.
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The Wholesale Price Index (WPI) based inflation too rose to 3.18 per cent in April, mainly on account of spike in fuel prices, as per inflation data released by the government.
On RBI's policy stance, the report said, the RBI has enough reasons to raise rates by 50 bps in this cycle.
"We are now pencilling in two back-to-back 25 bps rate hikes at the August and October 2018 meetings, respectively," it said.
A further hike in 2019 will depend on the national election outcome, and health of India's banking sector, and strength of world growth, US dollar, US rates and oil prices, the report said.
In its first bi-monthly monetary policy for 2018-19, RBI left repo rate unchanged at 6 per cent. The MPC maintained status quo for the fourth consecutive time since August last year.