Marginal rise in inflation after a gap of over two months should not deter the Reserve Bank of India from reducing key benchmark interest rates in its quarterly review of the monetary policy to be unveiled on January 27, according to research arm of Moody's.
"This (inflation) is reasonably close to the Reserve Bank of India's tolerance range, and does not warrant a pause to monetary easing due to inflation concerns. . ." Moody's Economy.com, which forecasts another round of interest rate cuts next week following the scheduled RBI meeting, said in a statement.
After declining for 10 consecutive weeks, Inflation, based on wholesale prices, rose by 0.36 percentage points for the week-ended January 10, from 5.24 per cent for January 3.
It added that the reacceleration is perhaps a sign that inflation will stabilize at the mid-five per cent rate.
However, it said,the monetary easing cycle will not go beyond mid-2009 and in the later half of the year inflationary pressures are set to regain momentum in line with an expected rebound in global commodity prices.
"As major economies around the world may also begin to show signs of bottoming then, the RBI will likely sit tight during the second half and commence monetary tightening when growth is no longer a concern in 2010," the statement added.
It added that in the present economic environment, the RBI is expected to focus on the growth rate and credit market stability when reviewing monetary policy and so the monetary easing cycle will continue through the first half of 2009.
Since October 2008, the RBI has released over Rs 3,20,000 crore (Rs 3,200 billion) into the banking system to usher in a low-interest regime in the economy, as prices of fuel, agricultural commodities and metals plunged, easing inflationary pressure.
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