The retail inflation is likely to get stuck at 8-10 per cent instead of declining to 7 per cent by March, 2015 as a possible El Nino event could push up food prices, A Bank of America Merrill Lynch report said today.
Both retail and wholesale price inflation accelerated in March due to rising food prices.
While wholesale inflation in March rose to a three-month high of 5.7 per cent, retail inflation inched up to 8.31 per cent after softening for three straight months since December.
The RBI's target is to ease CPI (retail) inflation to 8 per cent by January, 2015 and then further to 6 per cent by January, 2016.
According to the global financial services major, the Reserve Bank of India (RBI) is likely to hold rates at its June policy review amid rise in El Nino risks.
"We advise clients to focus on the IMD's first monsoon forecast in mid-April at a time of rising El Nino risks," BofA-ML said adding that the Southern Oscillation Index (SOI), a lead indicator of a possible El Nino event, has dipped in recent weeks (a consistent reading below the -8 mark signals an El Nino event).
El Nino refers to warmer-than-average sea surface temperature in central and eastern tropical Pacific Ocean. This condition occurs every 4-12 years and had last impacted India's monsoon in 2009, leading to the worst drought in almost four decades.
If El Nino occurs by summer, it will drive rain clouds away and impact the June-September monsoon. If it stretches to the fall, India will mercifully escape, the report added.
"We remain concerned that this could hurt FY 2015 growth by 50-75 basis points, especially if the RBI delays rate cuts due to rising agflation/inflation," the report said, adding there is a strong co-relation between the SOI and the agricultural GDP growth.
"We expect RBI Governor Raghuram Rajan to hold rates on June 1," the report said.
The RBI had raised policy repo rates three times since he took over in September.