Retail inflation has peaked in the country but is unlikely to come down enough for the Reserve Bank to make rate cuts in the whole of 2021, Japanese brokerage Nomura said on Friday.
Over the medium term, there are chances of inflation heating up again and the RBI may have to switch to hiking rates as well in 2022, Nomura said.
Even as the GDP has been switching, the RBI has been unable to respond by delivering more rate cuts because of the high inflation which has been consistently overshooting the target set for it by the government.
"In the near term, we see reasons for optimism. After remaining elevated through 2020, we believe consumer price inflation (CPI) has peaked," the brokerage said, pointing to October's 7.6 per cent level as the highest. The number cooled to 6.93 per cent in November.
Lower food inflation on improving supply dynamics, lagged effects of muted demand and base effects should drive headline inflation lower to 4.5-5.0 per cent in 2021 from the 6.7 per cent in 2020, it said.
The lower inflation should come as a relief from a policy perspective, but the core (excluding food and fuel) inflation is sticky, it said.
"We expect liquidity withdrawal to begin around Q2 and the repo rate to be left unchanged through 2021 but hiked by 0.50 per cent in H1 2022," the agency said.
Next year will mark a passing of the baton from supply-side drivers to the demand side from an inflation perspective, the brokerage said.
The 'golden window' of growth induced disinflation is fast receding and, even as food inflation corrects, core inflation will remain sticky at 5 per cent in 2021, as rising commodity input cost pressures amid firming demand lead to a gradual return of firm pricing power, it said.