Goldman Sachs

Headline inflation in India may rise to 5.3 percent in financial year 2019 from an expected 3.4 percent in financial year 2018, according to the Goldman Sachs India Outlook 2018 report.

The report further noted that rising consumer prices in the country will in turn put pressure on the Reserve Bank of India (RBI) to hike lending rates for the financial year 2018-19.

"The Monetary Policy Committee is likely to take a somewhat patient approach in this particular (rate hiking) cycle as private investment growth would have only begun to pick up," Goldman Sachs India Outlook 2018 stated.

The report further said that India's consumer price index (CPI) is likely to go up because of higher commodity prices of oil and coal.

"Higher inflation, coupled with a pickup in the economy and rising interest rates in the US, may prompt India's central bank to increase its benchmark lending rate by 75 basis points overall in the coming year," the report said.

In its last monetary policy meeting, in October, RBI chose to maintain the status quo by keeping the repo rate unchanged at 6 percent, despite concerns of a slowdown in the economy.

Moreover, the central bank in its last meeting slashed the country's growth outlook for the current year from 7.3 percent to 6.7 percent. Also the RBI raised its inflation forecast marginally and said it expects CPI inflation to pick up to 4.2 percent in the third quarter of the fiscal 2018 and 4.6 percent in fourth quarter, mildly up from its earlier forecast of 3.5-4.5 percent inflation in the second half of the year.

Meanwhile, Goldman Sachs expects the Indian economy to grow at 8 percent in the next fiscal from a projected 6.4 percent in fiscal 2018, citing that "Idiosyncratic shocks of demonetisation and GST implementation fade and the mega-bank recapitalisation improves credit growth."

It is highly unlikely that RBI will slash policy rate further, mostly because there is hardly any room for it, even after economic growth hit three-year low and private sector investments are halted.