Morgan Stanley on Friday said it expects retail inflation in India to rise to 8.5 per cent in the near term and cool off to 6.5 per cent by December.
Given this outlook on the consumer price index-based inflation, the foreign brokerage said it expects Reserve Bank of India (RBI) to hold key rates in its next monetary policy review due on April 1.
"In the context of CPI inflation remaining above 8 per cent in near-term, we expect RBI to keep policy rates on hold at the next monetary policy meeting (on Apr 1)," it said.
Morgan Stanley said volatility in food prices and a base effect will result in the CPI inflation, which cooled down to 8.1 per cent for February, to rise to 8.5 per cent in the near term.
It will, however, drop to 7.3 per cent by September as the effects of the monetary tightening, the corporate sector's focus on improving productivity, demand compression due to slower growth and lower commodity prices set in.
The number will come down further to 6.5 per cent by December on the base effect, it further said.
"We see risks emerging to the food inflation outlook due to the recent weather-related concerns prompted by unseasonal rain and hailstorms in some parts of the country."
The RBI is targeting to reduce the CPI inflation number to 8 per cent by January, 2015, and narrow it down further to 6.5 per cent by January, 2016.
The brokerage said seasonally favourable factors will improve the liquidity conditions in the economy and may result in some easing on the short-term rate front.
Unlike other analysts who see India's current account deficit rising in FY 2015, Morgan Stanley said the gap will come down further to 1.6 per cent of GDP from the 1.7 per cent level it is estimating for FY 2014.
The current account deficit, which rose to an all-time high of 4.8 per cent in FY13, is narrowing drastically on the back of contraction in gold imports.
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