Headline inflation is expected to continue its rally through the rest of this fiscal, and while WPI is likely to average 3.9 per cent, CPI will average close to 5 per cent in 2016-17, says a report.
According to a report by Kotak Institutional Equities, with favourable monsoons, there is likely to be a correction in food prices though headline inflation will continue to trend up through the rest of the current fiscal.
July WPI inflation surprised on the upside with 3.55 per cent after 1.62 per in June.
"This was the fourth consecutive positive reading after almost 1.5 years of contraction and we expect this trend to continue over the next few months," Kotak Institutional Equities said in a research note adding, "we expect WPI inflation to average 3.9 per cent in this fiscal against (-)2.5 per cent in 2015-16 fiscal".
The upturn in WPI inflation will indicate a pickup in producers' input prices, which in turn would contribute to retail price pressures with a lag.
The report noted that the recent surge in food prices will begin to fade in the following weeks and a favourable base effect will keep the second half of this fiscal inflation trajectory in comfort zone.
Regarding the Reserve Bank's policy stance, the report noted that CPI inflation would be RBI's focus and there is scope for another 25 bps cut in the October-December quarter.
"We maintain our call for another 25 bps rate cut in fourth quarter of this year. However, the policy stance ahead will be a function of the collective decision-making of the MPC and their interpretation of the inflation target," the report said.
If the target remains flexible as was highlighted by the RBI in the post policy call (4-6 per cent range instead of 4 per cent by end of next fiscal), then further scope for easing may open up, it added.
RBI Governor Raghuram Rajan on August 9, left interest rates unchanged in his last monetary policy review as inflation hit near 2-year high but said the central banks stance remains "accommodative".
Meanwhile, the government, in consultation with the RBI, has set an inflation target of 4 per cent within a band of (+/-) 2 per cent for five years to 2021.
The next monetary policy on October 4 is likely to be decided by a six-member interest rate setting panel, instead of the present practice of RBI governor deciding the interest rate.
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