The Reserve Bank of India is expected to lower the interest rates in the first half of this year, largely owing to 'below estimate' inflation, says a DBS report.
Rising prices of petrol and diesel fuelled WPI inflation to 3.39 per cent in December 2016.
According to the global financial services major, the WPI readings are likely to head towards 4 per cent in the first quarter of this year from 3.4 per cent in October-December quarter of 2016.
These readings are far from "threatening" levels and still hovering below the 5.4 per cent averaged in the past decade.
"On policy, the RBI is likely to monitor CPI inflation more closely. Below-estimate inflation and soft incoming data are expected to be the main reasons behind the central bank considering a rate cut in first half of this year," DBS said in a research note.
Though timings of the rate cut, between the February and April policy meetings is a 'close call', following which rates are likely to 'plateau' it said.
Beyond a rate cut in the first half of this year, the scope for further rate cuts are unlikely largely owing to risks from oil prices, GST implementation, growth pick-up, public-sector allowance hikes and higher US interest rates, it added.
On December 7, the central bank kept interest rate unchanged despite calls for lowering it and also lowered the economic growth projection by half a percentage point to 7.1 per cent in the first policy review post demonetisation. The central bank will hold its next monetary policy meet on February 8.