Rising prices to push inflation to 8%

Rising prices of food items and industrial goods are likely to push inflation to eight per cent in the next six months, much above the RBI's projection of 5 per cent, global financial services firm Nomura has said.

"We have raised our average WPI inflation forecasts from 2 per cent to 3 per cent year-on-year in 2009-10 and from 5.7 per cent to 6.8 per cent in 2010-11, with an end-March 2010 estimate of 8 per cent versus the RBI's target of around 5 per cent," Nomura said in a report.

It further said that inflation is already running above the RBI's comfort level, but the central bank is waiting for confirmation that the current recovery is durable.

However, double-digit industrial output growth and above 5 per cent readings on the wholesale price inflation will impel the RBI to hike its short-term lending (repo) and short-term borrowing (reverse repo) rates by 125 basis points each by end-2010, starting in the first quarter of 2010.

"... we are also penciling 125 basis points of cash reserve ratio hikes by end-2010 into our forecasts, with a first hike possibly before the end of this year," it added.

Nomura said that its estimate of WPI input prices has risen much faster than WPI output prices.