With economic activity still to reach pre-pandemic levels, the RBI may slow down the pace of rate hikes until next year to quell soaring inflation while supporting growth, the Asian Development Bank (ADB) says in its latest report.
The Manila-based multilateral funding agency has raised the inflation forecast for the current fiscal year ending in March 2023 to 6.7 per cent from its earlier projection of 5.8 per cent.
For the next fiscal year too, the forecast has been revised upwards to 5.8 per cent from 5 per cent earlier.
Inflation will remain elevated this year and the next, ADB said in an update to its flagship Asian Development Outlook (ADO) 2022 report.
"This Update forecasts the inflation rate averaging 6.7 per cent in FY2022 (fiscal ending in March 2023) before moderating to 5.8 per cent in FY2023 (ending in March 2024), just below the central bank target range of 2 - 6 per cent," it said.
Both forecasts are higher than ADO 2022's projections.
Even though supply pressures are expected to ease in the current fiscal year, upward pressure on inflation could continue because of demand-side pressures caused by increasing economic activity, according to the ADB report.
The report says the Reserve Bank of India (RBI) is expected to increase policy rates even though economic activity is still below the pre-pandemic trend and inflation continues to be driven more by domestic supply conditions than international factors.
"The RBI may, however, consider slowing the pace of policy rate hikes until next year because economic activity, although increasing, remains below the pre-pandemic trend.