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Inflation likely to be sticky: Nomura

Research firm also says that the rates are likely to be on hold for the rest of the year

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Core is likely to remain "sticky" or inch marginally higher in the third quarter of this calender year, leaving the Reserve Bank with little room to cut key policy rates, research firm has said.

Nomura in a research note said, core inflation which stood at 4.8% in June, will either remain sticky or inch marginally higher in the third quarter of this year, despite weak demand.

"The window for reversal in policy rates is not yet in place," Nomura said, adding that "We expect policy rates to remain on hold in 2012."

"The main reasons for sticky selling prices despite slowing growth are the lagged effects of INR depreciation, elevated inflation expectations and supply side bottlenecks that have kept cost pressures elevated," Nomura said.

At a time when food price pressures are visibly building up, sticky core inflation is likely to add to the uptrend in headline inflation.

According to the RBI's industrial outlook survey, selling price expectations have remained sticky.

The net percentage of respondents that expect selling prices to rise stood at 18.8% in Q3 2012, a tad lower than in Q2 (19%), but much higher than the first quarter of 2012 when it stood at 14.7%.

Selling price expectations data refers to the percentage of respondents expecting selling prices to rise minus the percentage of respondents expecting selling prices to fall.

In the first quarter review on July 31, the retained the repo rate at 8% and the CRR at 4.75%, but chose to lower the SLR by one% to 23%.

The Wholesale Price Index-based inflation, at 7.25% in June, is much above the RBI's comfort level of 5%. Besides, retail inflation too remains at the elevated level of 10.02%.

Meanwhile, India's economic growth has slowed to nine- year low of 6.5% in the 2011-12 fiscal, and 5.3% in the January-March quarter. RBI lowered the growth forecast for the current fiscal to 6.5% from 7.3% earlier.

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