Inflation is expected to remain above 7.0 per cent and shoot up to 7.9 per cent in third week of August, investment banker DSP Merrill Lynch has warned.
As against the Reserve Bank of India projection of 5-5.5 per cent average inflation during this fiscal, the merchant banker pegged the rise in price level at a higher 6-6.2 per cent.
"We believe inflation is likely to remain above 7.0 per cent throughout August and expect it to peak at 7.9 per cent in third week of August," DSP Merrill Lynch said in a report.
The merchant banker revised upwards its peak inflation projection to 7.9 per cent from its earlier estimate of 7.1 per cent.
The overall price level was expected to remain higher mainly due to rise in the fuel prices from August.
In the third week of August, it said fuel prices is to be higher by 12.2 per cent, while primary articles would be costlier by 7.8 per cent and manufacturing by 6.4 per cent.
Inflation will average higher at 6.0 per cent in 2004-05 as against earlier estimation of 5.9 per cent.
However, it cautioned "rising oil prices remain the key risk and if oil companies raise fuel prices by 3-6 per cent over the next six months, average inflation could rise to 6.2 per cent."
Inflation at 7.51 per cent for the week ended July 24 came as a surprise for DSP Merrill Lynch, which it had estimated to be at 6.8 per cent.
"This was principally led by a spike in inflation of primary products, which rose to 6.4 per cent against our expectation of 4 per cent," it said.
Inflation on account of fuel at 10 per cent and manufacturing products at 7.1 per cent were more or less on expected line.
"We believe inflation is likely to fall by 30 per cent from its peak level 7.9 per cent by the year-end to around 5.6 per cent owing to the possible softening of fuel inflation," DSP Merrill Lynch said.
By the year-end, it expects fuel inflation to almost halve to 5.5 per cent from the present 10 per cent but primary inflation is likely to hover around 8.6 per cent.
For the fiscal 2005-06, the investment banker maintained its current estimation of inflation at 5.2 per cent with chances of a further decline given the sharp spike recently.
Though 10-year bond yields increased to 6.42 per cent on the back of higher than expected inflation, DSP Merrill Lynch said bond yield movements may mirror inflationary trends and could spike at 6.7-6.8 per cent.
However, it did not revise the year-end target of 6.5 per cent for the 10-year benchmark yield.
© 2026