New Delhi: The Reserve Bank of India (RBI) may keep its rate hikes limited to 25-50 basis points during the current tightening cycle, as markets are pricing in a significantly more aggressive path than warranted by the prevailing inflation trends, according to a report by global brokerage Nomura.
Nomura analysts have assigned an 80% probability to what they describe as a limited recalibration cycle, rather than a broader tightening phase involving more than 75 basis points of rate increases.
RBI May Raise Rates by 25 Basis Points Twice
Financial markets are currently pricing in nearly 125 basis points of rate hikes over the coming year. Nomura believes this expectation is excessive considering the current inflation environment.
The brokerage expects the RBI could increase its policy rate by 25 basis points each in October and December. If both hikes take place, the terminal policy rate would reach 5.75%.
At the same time, Nomura sees the possibility of only a single rate increase during the cycle.
The report expects the likelihood of additional rate hikes to decline from February 2027, when consumption growth could moderate and the inflation outlook for the following year improves.
Core Inflation Shows Significant Moderation
Nomura said the current disinflation trend is different from the conditions seen during 2016-17. The latest moderation has been driven to a significant extent by a decline in core inflation.
Core inflation has dropped from around 5% to approximately 3%, according to the report. Given the limited evidence of inflation pressures becoming widespread, Nomura said a prolonged tightening cycle is unlikely.
However, the brokerage noted that a pre-emptive rate increase could still be appropriate to help keep inflation expectations anchored.
Food Prices Remain Key Inflation Risk
Food prices continue to represent the main short-term risk to the inflation outlook. At the same time, government measures aimed at improving supply could help limit some of the pressure on prices.
Nomura expects headline consumer price inflation to moderate to around 5.3% during the first half of 2027.
Inflation is then projected to fall below 4% in the second half of 2027. However, unfavourable base effects could add around 0.8 percentage point to headline inflation during October and November.
For the full financial year, Nomura has projected CPI inflation at 5.2% for FY27 and 4% for FY28. Its forecast for core CPI inflation stands at 4.3% for FY27 and 4% for FY28.
Disclaimer: This article is intended for general informational purposes and is based on the economic assessment and forecasts cited in the report. Inflation and interest-rate projections are subject to change as economic conditions and policy decisions evolve. Readers should refer to official RBI communications and updated economic data before making financial or investment decisions.