India’s monetary policy is at an inflection point as higher oil and food prices, along with expected Federal Reserve rate hikes, put pressure on the Reserve Bank of India (RBI) to tighten policy. However, markets may be pricing in an overly aggressive rate-hike cycle, according to analysts at Nomura.
The research and brokerage house noted that the current disinflationary trend bears some resemblance to the 2016-17 period. However, the drivers are different. While lower food inflation was the key factor behind the earlier decline, the current cycle has seen a significant moderation in core inflation, which has fallen from around 5 per cent to about 3 per cent.
Two possible policy paths
Nomura sees two broad paths for the RBI: a 25-50 bp recalibration of policy rates towards neutral levels, or a more aggressive tightening cycle involving more than 75 bps of hikes. It has assigned an 80 per cent probability to the former, arguing that there are limited signs of inflation becoming broad-based.
“In our baseline, the RBI hikes by 25bps in each of October and December to a terminal rate of 5.75 per cent, though there is some risk of a one-and-done hike. We see the probability of rate hikes diminishing from February 2027 onwards, because of a potential consumption slowdown and a lower year-ahead inflation outlook,” Nomura said.
Beyond February 2027, Nomura expects the probability of further rate increases to diminish, citing the potential for a slowdown in consumption and a lower year-ahead inflation outlook.
Food inflation key risk
Nomura expects headline CPI inflation to rise from 4.8 per cent year-on-year in August to 6.3 per cent in the fourth quarter, before easing to around 5.3 per cent in the first half of 2027. Inflation, Nomura said, is expected to fall below 4 per cent in the second half of 2027.
It estimates that adverse base effects could add around 0.8 percentage point to headline inflation in October-November.
For the full financial year, Nomura expects CPI inflation at 5.2 per cent in FY27 and 4 per cent in FY28. Core CPI inflation is forecast at 4.3 per cent and 4 per cent, respectively.
