Goldman Sachs expects the central bank to hike rates in early 2010 as economic activity picks up in the second half of 2009/10 financial year and inflation gathers pace, it said in a note on Friday.
India's industrial output grew for a second successive month in May as strong domestic demand offset faltering exports, which analysts said added weight to a view the central bank would not cut rates further.
The Markit Purchasing Managers' Index (PMI) showed earlier this month that manufacturing activity expanded for a third straight month in June.
Goldman Sachs said the positive fiscal stimulus in the budget and expectations of an upturn in the investment cycle in second half of 2009/10 may keep domestic demand robust, despite the prospects of a poor monsoon and a weak external environment.
It also maintained its gross domestic product forecast of 5.8 per cent for 2009/10, which is still lower than the government's forecast of 7 per cent. Goldman Sachs also said it expects inflation to rise to 6.5 per cent by March 2010.
The Indian rupee may appreciate against the dollar as a stable government ands domestic demand will attract foreign portfolio flows and a narrowing trade deficit turns the balance of payments positive.
The rupee may gain to 47.3 per dollar in three months, 46 per dollar in six months and 44.7 per dollar in a year, it added.
At 3:57 p.m., the Indian rupee was trading at 48.91/94 per dollar from its previous close of 48.72/73.
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