The Reserve Bank is likely to increase its key rates by 0.25 per cent this year as inflation is expected to be at a higher range due to wide fiscal deficit and high prices of oil and farm produce, a report said today.
The headline consumer price inflation (CPI) will not breach the 6 per cent mark which is the upper end of the target band for RBI, but a moderation towards the 4 per cent target is also "unlikely", Care Ratings said in a report.
"The main concerns today are on both the demand and supply sides," it said, elaborating that higher fiscal deficit is the main issue on the demand side, while the proposed higher MSP (minimum support price) of farm products, oil prices and house rent allowance are potential supply side threats.
"A 0.25 per cent hike in repo rate is expected during 2018," the note added. The key repo rate at which it lends to the system stands at 6 per cent currently.
It can be noted that the RBI shifted its policy stance to neutral last year, after being in the accommodative phase for over two years. After rising to 5.21 per cent in December, inflation cooled-down to 5.07 per cent for January.
The RBI expects inflation to go up to between 5.1-5.6 per cent in the first half of the next fiscal or the April-September period, before cooling down.
In its report, Care Ratings said that the picture on inflation will be clear only after the monsoon rains.
The agency said the market will not be spooked if the hike in policy rate comes in as it already seems to have factored it in.
The RBI had left the key rates unchanged in its last policy announcement in February, but cited risks on inflation which had led many to term it as a hawkish policy document.