Rising prices of food items and industrial goods are likely to push inflation to eight per cent in the next six months, much above the RBI's projection of 5 per cent, global financial services company Nomura has said.
"We have raised our average wholesale price index (WPI) inflation forecasts from 2 per cent to 3 per cent y-o-y in 2009-10 and from 5.7 per cent to 6.8 per cent in 2010-11, with an end-March 2010 estimate of 8 per cent versus the RBI's target of around 5 per cent," Nomura said in a report.
It further said that inflation is already running above the RBI’s comfort level, but the central bank is waiting for confirmation that the current recovery is durable.
However, double-digit industrial output growth and above- 5 per cent readings on the wholesale price inflation will impel the RBI to hike its short-term lending (repo) and short-term borrowing (reverse repo) rates by 125 basis points each by end-2010, starting in the first quarter of 2010.
"...We are also penciling 125 basis points of cash reserve ratio hikes by end-2010 into our forecasts, with a first hike possibly before the end of this year," it added.
Nomura said that its estimate of WPI input prices has risen much faster than WPI output prices.
A number of input costs have increased, including sugar, cereals, organic chemicals, fodder, tea & coffee, milk, non-ferrous metals, logs & timber, rubber, jute & mesta, among others, it said.
"As demand increases in these sectors, firms are likely to hike their output prices in the coming months...Domestic prices of these inputs could be headed higher in the coming months, with a consequent impact on output prices," Nomura added.
