Financial services major Goldman Sachs has marginally revised upwards its India CPI forecast to 5.5 per cent for the fiscal citing higher food prices but said the upside risks are limited due to delay in the rollout of the pay commission award.
According to the global major, narrowing of the output gap and abating favourable base effects from weak commodity prices may lead to an rise in inflation.
"We mechanically adjust our FY17 headline CPI inflation forecasts upwards to 5.5 per cent yoy, from 5.3 per cent earlier, due to higher than expected food inflation readings year-to-date," Goldman Sachs said in a research note, adding core inflation is expected to average 4.8 per cent yoy this fiscal from 4.6 per cent a year ago.
According to the firm, food inflation is likely to remain relatively contained following muted MSP hikes, benign international food prices and better monsoon. Meanwhile, crop sowing for pulses has increased 35 per cent yoy as of August 19.
The report further noted that the civil service wage hike, which is anticipated to add 35 bps to headline inflation when implemented, is likely to have a more muted impact on inflation following the delay of the increase in housing allowance.
Additionally, the implementation of GST will take place in FY18 at the earliest, leading to 'no impact' on headline inflation this fiscal year.
On RBI's policy stance, the report said with the central bank expected to continue focus on bringing down inflation, policy rates are likely to be kept on hold for the remainder of 2016.
RBI on August 9, left key interest rates unchanged in his last monetary policy review as inflation hit near two-year high but said the central bank's stance remains "accommodative".
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