RBI strives to contain the rise in prices to 5% by March 2017.
Retail inflation, aggravated by food prices and a sharp recovery in global commodities, will keep RBI guarded on rate cut as it strives to contain the rise in prices to 5% by March 2017, Ind-Ra said on Monday.
Any number higher than 5.4% will cause a shift towards cautiousness in market sentiment, the rating agency said, adding that consequently, the yield may inch up to 7.55% with low expectations of a rate cut in the near term.
Meanwhile, according to government data later in the day, retail inflation has rose to 5.76% in May, from 5.47% in April.
The Reserve Bank of India (RBI) last week had kept key policy rates unchanged in the wake of uncertainties on the inflation front but had said that it would continue with the accommodative policy stance.
India Research and Ratings (Ind-Ra) said it believes that the US Fed is unlikely to raise rates this week, keeping the rupee swinging in a large range.
"With the low probability of a Fed rate hike, communication from the Fed will be critical and is likely to be positive for the rupee," it said.
It predicted that benchmark 10-year G-sec is likely to be in the 7.46-7.56% range this week (7.49% at close on 10 June 2016), while the rupee might range between 66.40/USD-67.35/USD (66.76/USD at close on June 10, 2016).
On decline in factory output, Ind-Ra said that excess capacity in the manufacturing sector is constraining capital expenditure, leading to a contraction in the Index of Industrial Production (IIP) growth.
"IIP contracted 0.8% year-on- year in April 2016. The dismal performance of the manufacturing sector pulled the overall IIP growth down," it said.
The eight core industries that comprise around 38 per cent of IIP grew 8.5% in April 2016 compared to 6.4% in March, Ind-Ra said.
"This had raised hopes that IIP would show a further uptick from the marginally positive 0.3% growth in March 2016. Core sector growth has showed a clear uptrend since November 2015; however this has not found any resonance in IIP growth so far," it said.
Manufacturing (75.5% weight in IIP) contracted further to negative 3.1% in April 2016 after slipping into negative territory in March 2016 (negative 1.0%) from a marginal uptick of 0.7% in February 2016.
Noting that despite a sustained pick-up in consumer durables, a sustained contraction in capital goods has taken a toll on the manufacturing sector, Ind-Ra pointed out that GDP data also showed that gross fixed capital formation registered negative growth of 1.9% yoy in the last quarter of 2015-16, lowest in two years.
Ind-Ra said it believes there is an urgent need to change the base year of IIP to 2011-2012 from the present 2004-2005, to better reflect the manufacturing activity on the ground.
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