Inflation in India is not a "structural" issue and is likely to moderate to 6 per cent by January 2016 provided there is continued appropriate policy measures and absence of global macro shocks, says an UBS research report.
"Our detailed analysis of key drivers -- macro/micro, structural/cyclical, food all indicate that inflation (CPI and WPI) will keep moderating towards 6 per cent in January 2016," the research report said.
Inflation is expected to follow the above mentioned trajectory provided there is continued appropriate policy measures and in the absence of global macro shocks especially in Crude oil and rupee front, the report added.
WPI inflation declined to 5-month low of 5.19 per cent in July on account of decline in vegetable prices.
According to official figure, the Wholesale Price Index based inflation was at 5.43 per cent in June, and 5.84 per cent in July last year.
Meanwhile, retail inflation - based on Consumer Price Index - rose marginally to 7.96 per cent in July, from 7.46 per cent in June mainly due to higher prices of food items like vegetables, fruits, milk.
The report further noted that inflation is one of the key impediments to a recovery in Indian growth and lower inflation would enhance the efficiency of India's economy.
"Cross country experience suggests that inflation targeting policies have enjoyed some success in bringing inflation under control. If an inflation target is adopted then the implications could be significant for the nominal cost of funds in India on a more sustainable basis," UBS said.
The Reserve Bank of India is expected to keep policy rates on hold till late FY15, UBS said.
"As such we expect RBI and government fiscal policy will remain restrictive into FY 2016. Policy rate moves will likely lag inflation and possibly will lag 10-year govt bond yield moves," the report said.
The RBI had held its key rates in it August monetary policy review.
The RBI wants to maintain the number at 8 per cent by January 2015, but is targeting to take it down further to 6 per cent by January 2016.
