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Japanese brokerage Nomura today said it expects the Reserve Bank to hike the repo rate by 0.50% by June 2014, saying a sharp fall in the retail inflation is unlikely anytime soon.
The assessment comes a day after the apex bank kept repo, or short-term lending rate, unchanged at 7.75% at its mid-quarter review of monetary policy meet. The next policy review is due on January 28.
"We maintain our view of 0.50% repo hike in the first half of 2014, taking it to 8.25%," the firm said in a note.
"We expect food inflation to fall but core CPI to remain elevated and overall headline CPI to remain above 9% for a sustained period," the brokerage said.
RBI Governor Raghuram Rajan yesterday said the apex bank continues to be concerned over the high inflation -- the consumer prices based inflation zoomed to an 8-month high of 11.24% for November -- but will wait for more data before taking a call on a rate hike.
He said the decision of going with a status quo was a "close call" and added that RBI will be vigilant going forward.
"If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, Reserve Bank will act, including on off-policy dates, if warranted," he had said.
Nomura said the RBI has "clearly laid out its policy reaction function" warning that it will act of inflation does not move as per the expectation.
