RBI may retain policy rates in upcoming policy review: ICRA

Initial estimates place headline WPI at 7.25% in June 2012, appreciably lower than our estimate (7.7%).

In 2012, minimum support prices were increased substantially for various oilseeds and pulses, items for which imports are required to fill the domestic demand-supply gap. However, sowing of such items currently remains below trend on account of the sub-par coverage and magnitude of the monsoon rainfall, which may result in a further rise in prices. Overall, a hardening of inflationary expectations on the back of double-digit food inflation for the last four months remains a concern.

Sluggish industrial activity has led to some weakening in the pricing power of producers and core inflation has remained steady at around 5% in recent months despite a weaker Rupee. However, concerns persist on account of the recent rise in the price of the Indian crude oil basket and the weaker-than-normal progress of the monsoon. Accordingly, we expect that the RBI may retain the policy rate in the upcoming policy review.