Financial major Goldman Sachs on Monday said rising food and oil prices would push headline inflation to 6.5 per cent by March next year and the Reserve Bank may start hiking policy rates as early as January.
Further, it expects the Indian currency to harden against the dollar at Rs 44.7 from the current level of over Rs 47.5 in 12 months, a jump of about 6 per cent.
"We think WPI (wholesale price index) inflation will ratchet up to 6.5 per cent yoy (year-on-year) by March 2010, with risks firmly to the upside. Our forecast for end-December 2009 is 5.5 per cent," Goldman Sachs said in a research note.
The WPI for food has moved up rapidly by 15 per cent year-on-year in mid-September and the rising food prices are the biggest contributor to inflation currently, it said, adding rising oil prices will also put upward pressure on inflation.
"With inflation coming higher than expected, the RBI is likely to be on alert," it said. The WPI inflation rose to 0.83 per cent for the week ended Sep 19, above the previous week's annual rise of 0.37 per cent.
"We expect the RBI to hike policy rates in January 2010, culminating into a cumulative 300 basis points of tightening in the overnight rate, in calendar year 2010," Goldman Sachs economists Pranjul Bhandari and Tushar Poddar said.
The central bank had cut key lending rate to banks (repo rate) by 425 basis points from 9 per cent in various stages since last October to perk up the economy during the slowdown.