The inflation is likely to remain below the RBI's early 2017 target of five percent for the next 12 months, as per the latest HSBC report.
As per the global financial services major, the declining trend in inflation is expected to continue as new crop streams into the market and CPI inflation could fall to under 4.5 percent in January-March 2017.
However, the vegetable prices are expected to completely reverse their summer ascent and higher pulse production may reduce inflation by another 40 bps.
"RBI has two objectives to reach its five percent inflation target in early 2017 and keep real rates at the 1.5-2 percent range. Marrying the two would open up space for easing by 50 bps," states the report.
However, this is the first review under the new RBI Governor Urjit Patel, who has assumed charge effective September 4 after the end of his predecessor Raghuram Rajan's three-year tenure.
"This is because, by December, two new inflation prints, which are expected to be well below five percent, will be available," said the report.
"Our estimates point to a balance of payments (BoP) surplus of USD 25 billion in 2016-17, and given the possibility of currency leakage to the tune of Rs. 2.5 trillion this year, we expect bond purchases to continue at a rapid clip, given that RBI wants to move closer to its aim of closing the rupee deficit," it added.
The second half of 2017 may see some policy-related upside risks to inflation such as the second round effect of the government wage hikes and a temporary hardening of inflation if the GST rates are over 18 percent.
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