The sharp fall in retail inflation in August has increased the chances of monetary easing by the central bank, India Ratings and Research (Ind-Ra) said.
Retail inflation cooled to five-month low of 5.05 percent in August, reviving hopes for a rate cut by RBI to boost growth.
"This has made the central bank's target of bringing retail price inflation down to 5 percent by March 2017 achievable; however, it may be early to rejoice given the baffling behaviour of retail inflation in the past," the rating agency said in a statement.
"The cyclical components either aggravate or soften it as is evident from the movement in wholesale prices," it added.
Ind-Ra opined that industrial growth will not return to a sustained and high growth path as long as excess capacity in the manufacturing sector remains and private sector investment cycle does not revive.
The Index of Industrial Production (IIP) contracted 2.4 percent in July 2016 as against a growth of 2.0 percent in June.
The rating agency said it believes scope for RBI action on rate front appears skewed towards December policy review than October 2016, although the sharp fall in inflation from 6.1 percent in July 2016 is likely to accentuate the expectation of rate cut in the October review itself.
"Moreover, the RBI would have better clarity on the retail inflation trajectory for the last quarter of the fiscal, US electoral outcomes and Federal Reserve rate trajectory by December 2016," Ind-Ra said.
It noted that the maturity of large FCNR-B (foreign currency non-resident) deposits worth USD 26 billion, which are coming due in the next two months, is likely to be the litmus test for the rupee as well as the RBI.
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