RTTNews - The financial services firm, Nomura, in its report, forecast India's wholesale Price Index based inflation to touch around 5% to 5.5% by this fiscal end, thereby forcing the Reserve Bank of India to tighten money supply. RBI has targeted 4% inflation for the fiscal 2010, media reports said.

Nomura expects the economy and credit growth to recover this fiscal year, as banks are expected to ease the credit controls. Hence, the country may face excess liquidity. Therefore, Nomura expects increasing inflationary worries to force the RBI to start implementing exit strategies from its unconventionally loose monetary policy, with the initial focus on liquidity management.

The RBI reduced short-term lending and borrowing rates by 4.25% and 2.75% respectively since the collapse of Lehman Brothers in the US to infuse liquidity in the system.

The central bank will initially focus on withdrawing liquidity by issuing treasury bills in the fourth quarter, followed by a cash reserve ratio hike of 100 basis points in 2010, Nomura added.

Nomura expects policy rate hikes of 75 basis points to be followed only later in 2010, once the recovery takes hold.

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