Financial markets are pricing in a far more aggressive rate-hike cycle from the Reserve Bank of India than the inflation outlook justifies, global brokerage Nomura said in a report on Monday, forecasting that the central bank will limit its tightening to just 25–50 basis points this cycle.
Markets are currently pricing close to 125 basis points of rate hikes over the next year, which Nomura called excessive given current inflation dynamics. The brokerage assigned an 80 per cent probability to a limited "recalibration" cycle of 25–50 basis points, rather than a broader tightening phase exceeding 75 basis points.
Two hikes, then pause
Nomura's central forecast sees the RBI raising its policy rate by 25 basis points each in October and December, taking the terminal repo rate to 5.75 per cent. It also sees a possibility that the central bank may raise rates only once.
The probability of further increases is expected to diminish from February 2027, as consumption could slow and the year-ahead inflation outlook improves, the report said.
The key difference from past cycles, Nomura argued, is core inflation. The current disinflationary trend differs from the 2016–17 episode because it is being driven significantly by lower core inflation, which has fallen from around 5 per cent to about 3 per cent. "Given limited signs of generalisation, a tightening cycle is unlikely," Nomura said, though it added that a pre-emptive rate hike could still be appropriate to keep inflation expectations anchored.
Inflation seen cooling in 2027
Food prices remain the main near-term risk to the inflation outlook, although government supply-side measures could help contain some price pressures, the report noted. It also flagged that adverse base effects could add about 0.8 per cent to headline inflation in October–November.
Nomura forecasts consumer price inflation at 5.2 per cent in FY27, easing to around 5.3 per cent in the first half of 2027 before falling below 4 per cent — the RBI's midpoint target — in the second half of 2027.
The call lands as the RBI has been actively defending the rupee near the 96-per-dollar level while higher oil prices and rising US Treasury yields pressure the currency, underscoring the delicate balancing act facing India's central bank.
Sources:
Business Standard: Markets pricing an excessive 125bps rate hike over the next one year — Nomura
NDTV Profit: RBI likely to hike repo rates by 50 bps taking terminal rate to 5.75% by December — Nomura
Markets are currently pricing close to 125 basis points of rate hikes over the next year, which Nomura called excessive given current inflation dynamics. The brokerage assigned an 80 per cent probability to a limited "recalibration" cycle of 25–50 basis points, rather than a broader tightening phase exceeding 75 basis points.
Two hikes, then pause
Nomura's central forecast sees the RBI raising its policy rate by 25 basis points each in October and December, taking the terminal repo rate to 5.75 per cent. It also sees a possibility that the central bank may raise rates only once.
The probability of further increases is expected to diminish from February 2027, as consumption could slow and the year-ahead inflation outlook improves, the report said.
The key difference from past cycles, Nomura argued, is core inflation. The current disinflationary trend differs from the 2016–17 episode because it is being driven significantly by lower core inflation, which has fallen from around 5 per cent to about 3 per cent. "Given limited signs of generalisation, a tightening cycle is unlikely," Nomura said, though it added that a pre-emptive rate hike could still be appropriate to keep inflation expectations anchored.
Inflation seen cooling in 2027
Food prices remain the main near-term risk to the inflation outlook, although government supply-side measures could help contain some price pressures, the report noted. It also flagged that adverse base effects could add about 0.8 per cent to headline inflation in October–November.
Nomura forecasts consumer price inflation at 5.2 per cent in FY27, easing to around 5.3 per cent in the first half of 2027 before falling below 4 per cent — the RBI's midpoint target — in the second half of 2027.
The call lands as the RBI has been actively defending the rupee near the 96-per-dollar level while higher oil prices and rising US Treasury yields pressure the currency, underscoring the delicate balancing act facing India's central bank.
Sources:
Business Standard: Markets pricing an excessive 125bps rate hike over the next one year — Nomura
NDTV Profit: RBI likely to hike repo rates by 50 bps taking terminal rate to 5.75% by December — Nomura
