New Delhi: Inflation is likely to remain high at near 8 percent levels by December end due to high government deficit and strong growth in rural wages, says a report by Morgan Stanley.
According to Morgan Stanley, high government deficit and strong growth in rural wages (which is growing at around 20 percent year-on-year for last three years) are key factors keeping inflation expectations high.
"WPI inflation is likely to remain high in the 8-8.2 percent range until the quarter ended December 2012 and it is expected to 'moderate' to around 7-7.5 percent level by quarter ended March 2013," the report said.
Wholesale price index-based inflation was at 10-month high level of 7.81 percent in September.
The report said that RBI is "facing a dilemma on policy action in the current stagflation-type environment". "While growth is slowing, inflation remains a challenge," it said.
The Reserve Bank will come out with its policy review on October 30. The industry has been demanding a rate cut to boost economic growth.
The macro conditions of the country warrant a delay in policy rate cuts, Morgan Stanley said.
"We believe that the policy decision to reduce rates in the next monetary policy review on October 30, will be touch-and-go," the report said.
Trade deficit for September widened to USD 18.08 billion compared to USD 15.6 billion in previous month.
On a three-month trailing basis, the trade deficit widened to 10.8 percent of GDP in September as against 9.1 percent of GDP in August 2012.
Elevated level of trade deficit implies that the current account deficit remained high at around 3.8-4 percent of GDP for the quarter ended September this year, the report said.
"The current economic environment, monetary easing is unlikely to help unless it is preceded by adequate fiscal tightening and control of rural wages," the report said.
Inflation has remained above 7 percent since late 2009. This is much above the RBI's comfort level of 5-6 percent.
The RBI has held its short-term lending (repo) rates unchanged at 8 percent since April 2012. In its policy review on September 17, RBI reduced the cash reserve ratio (CRR) -- the percentage of deposits banks keep with central bank -- by 0.25 percent to 4.5 percent.