RBI May Limit Rate Hikes to 25-50 bps, Inflation Could Ease in 2027: Nomura

The Reserve Bank of India (RBI) is likely to limit its interest rate increases to 25-50 basis points in the current cycle with markets pricing in a more aggressive tightening path than warranted, according to a report. Analysts at global brokerage Nomura assigned an 80 per cent probability to a limited recalibration cycle rather than a broader tightening cycle involving more than 75 basis points of rate hikes.

Markets are currently pricing close to 125 basis points of rate increases over the next year, which Nomura said was excessive given the current inflation dynamics. However, the central bank could raise its policy rate by 25 basis points each in October and December, taking the terminal rate to 5.75 per cent, according to the brokerage. Moreover, it also sees some risk of a single rate hike. The probability of further rate increases is expected to diminish from February 2027 as consumption could slow and the year-ahead inflation outlook improves, according to the report.

The current disinflationary trend differed from the 2016-17 period with the latest moderation driven significantly by lower core inflation. Core inflation has fallen from around 5 per cent to about 3 per cent, it added. "Given limited signs of generalisation, a tightening cycle is unlikely," Nomura said. It also stated that a pre-emptive rate hike could be appropriate to keep inflation expectations anchored. Food prices remain the main near-term risk to the inflation outlook, although government supply-side measures could help contain some price pressures.

It expects headline consumer price inflation to ease around 5.3 per cent in the first half of 2027. Additionally, inflation is expected to fall below 4 per cent in the second half of 2027, while adverse base effects could add about 0.8 per cent to headline inflation in October-November. For the full financial year, Nomura forecasts CPI inflation at 5.2 per cent in FY27 and 4 per cent in FY28. While core CPI inflation is projected at 4.3 per cent and 4 per cent, respectively.

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