DBS Bank in a report said firm inflation at a time when growth is showing early signs of a revival and fiscal slippage risks are on the rise, puts the central bank in a tight spot.
"The upcoming February's policy review is likely to see RBI raise its FY18 inflation forecasts and lower the growth projection, currently at 6.7 per cent. We expect the benchmark repo rate to be held unchanged at 6 per cent next month," the report said.
In the December review, RBI had increased its inflation forecast in the range 4.3-4.7 per cent in Q3 and Q4 from 4.2-4.6 percent estimated in the October review. DBS said clear guidance from RBI in the upcoming policy will be key in guiding the markets, going ahead.
"If the central bank perceives the current bout of firm inflation as transient as the impact of one-off factors like GST, spike rental allowances, and base effects, to roll off, rates are likely to remain on a prolonged pause," the report said.
The RBI may also increase the rates if crude prices firm up further or there is a sharp rupee fall or if global monetary policy changes. "A combination of these factors could push inflation past 5 per cent on a sustained basis," the report added.
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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