"Inflation picked up after months of food-driven disinflation. Looking ahead, the El Nino and geopolitical uncertainties are additional risks to inflation that have emerged in recent months, which should keep the RBI singing a hawkish tune and possibly hike policy rates further," it said without offering a timeline.
The retail or the consumer price-based inflation, which has gained greater currency within RBI recently, moved up to 8.3 per cent in March from February's 7.9 per cent, driven by a surge in food prices.
Drawing attention towards the possible El-Nino factor, which entails unusually warm temperatures which disrupt rainfalls, it pointed to 2009 experience, when it had last played out, resulting in a 14 per cent jump in food inflation as monsoons failed.
"If food inflation goes back to these levels from 9 per cent presently, it could potentially add up to 2.5 percentage points to headline CPI," it said in the note.
Additionally, it said the Rs 0.5 hike in diesel prices are expected to continue for at least one year, unless the new government changes the policies.
The RBI may play a wait and watch initially, but will have to eventually respond by hiking the policy rates, given its publicly stated target of having the headlinje CPI number at 8 per cent by January 2015 and down to 6 per cent by June 2016, as per the recommendations of the Urijit Patel committee.
It can be noted that Governor Raghuram Rajan has raised rates thrice since taking charge in September last year with an eye on the inflation level, but chose to take a pause at the last policy announcement on April 1.
With PTI inputs