Nomura analysts believe that markets may be pricing in too aggressive a cycle of interest rate hikes. In its September report, dated September 25, they noted that markets currently estimate the probability of a rate hike of approximately 125 basis points (bps) over the next year, which they consider excessive.
The research and brokerage firm forecasts an 80% probability of a limited 'recalibration' cycle, which would involve a rate increase of 25–50 bps, rather than a broader tightening cycle exceeding 75 bps. They also note that the current trend of slowing inflation bears some resemblance to the 2016–2017 period, although the driving forces differ.
Unlike the previous period, where the decline in food inflation was a key factor in the downturn, the current cycle shows a significant moderation in core inflation, which has fallen from about 5 percent to 3 percent.
Two possible monetary policy scenarios
Nomura considers two main paths for the Reserve Bank of India (RBI): either a recalibration of interest rates by 25–50 bps towards a neutral level, or a more aggressive tightening cycle with a rate hike exceeding 75 bps. The firm assigns an 80% probability to the first scenario, acknowledging limited signs that inflation is becoming widespread.
Despite this, Nomura believes that a preemptive rate hike would be prudent from a risk management perspective to anchor inflation expectations. In its base case, the RBI will raise the rate by 25 bps in October and December, bringing it to the target level of 5.75 percent, although there is a risk of a single hike.
Furthermore, Nomura expects that after February 2027, the probability of further rate increases will begin to decline due to potential consumption slowdown and a lower inflation forecast for the coming year.
Food inflation as a key risk
Nomura points out that food prices remain the most significant short-term risk to inflation forecasts. Although government supply-side measures may help curb some price pressures, declining yields create risks of rising food inflation in the near term.
According to Nomura's forecasts, year-on-year Consumer Price Index (CPI) inflation will rise from 4.8 percent in August to 6.3 percent in the fourth quarter, before slowing to approximately 5.3 percent in the first half of 2027. Inflation is expected to fall below 4 percent by the second half of 2027. The firm also estimates that adverse base effects could add about 0.8 percentage points to CPI inflation in October-November.
For the full fiscal year, Nomura forecasts CPI inflation at 5.2 percent in FY27 and 4 percent in FY28. The forecast for core CPI inflation is 4.3 percent and 4 percent, respectively.