- In a move that could push inflation higher in coming months, Finance Minister Arun Jaitley increased government spending for rural areas and announced a larger fiscal deficit target in Budget 2018.
- A Bloomberg survey shows the inflation rate is expected to hit 5.5 per cent by June.
- "Inflation is rising and the government has also deviated from the fiscal consolidation path outlined earlier. Clearly, the pressure is building on the RBI to hike rates. However, we expect a status quo in the near-term," said Tushar Arora, senior economist at HDFC Bank. "We believe that the RBI is likely to wait and see how durable these upside risks are."
- Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said: "We expect the RBI to remain on a pause in this policy. However, the tone will likely be more hawkish with probability of rate hikes in FY2019 increasing."
- Minutes from the RBI's December policy meeting showed policymakers were increasingly worried about inflation.
- In recent months, rising oil prices have pushed up the inflation rate and the government's decision to increase spending and raise the minimum support price for agricultural produce will add to escalating price pressures, say analysts.
- On the global front, there are also expectations of the Federal Reserve - the US central bank - embarking on a faster-than-expected pace of rate hikes, following strong US jobs data.
- Bond yields in India have also risen sharply in recent months amid concerns over inflation and fiscal deficit. Higher yields could hurt economic recovery.
- "New inflation risks are emerging post-budget, so it will have to sound hawkish - but not overly so," said BNP Paribas, adding that it expects two 25-bps rate hikes in the second half of 2018.
- But some analysts say a rate hike in 2018 is far from certain, as the RBI has to be careful not to slow an economy that needs rapid growth to create jobs.
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