Markets pricing 125 bps RBI hikes, but Nomura says bets are too aggressive; sees just 50 bps

According to fresh market updates, Indian markets may be pricing in a much more aggressive Reserve Bank of India tightening cycle than warranted by the economy, according to Nomura, which anticipates just 50 basis points of rate hikes by December against nearly 125 basis points at present priced in over the next year.

Nomura anticipates the RBI to mobilize the repo rate by 25 basis points each in October and December to 5.75 percent, but says the moves would amount to a “preemptive recalibration” rather than the start of a full tightening cycle. The brokerage argues that while food and energy prices could propel inflation elevated over the next six months, there are limited signs of broader inflationary pressures.

Why Nomura thinks markets are overpricing rate hikes

The RBI’s monetary policy is at an “inflection point”, Nomura stated, but it believes the current cycle is different from a conventional inflation-led tightening cycle. “Markets are pricing close to 125bp of rate hikes over the next one year, but our analysis suggests this cycle is fundamentally different,” the brokerage stated.

Nomura pointed to a moderation in India’s trend inflation and stated its “inflation generalization index confirms no signs of broadening”. At the same time, its leading index is signalling “below-trend expansion ahead”. This combination, according to Nomura, reduces the need for the central bank to embark on a prolonged rate-hike cycle.

The brokerage anticipates inflation to climb in the near term because of elevated food and energy prices, but stated these pressures could eventually weigh on demand and help bring inflation softer. “We expect the cyclical pressures from food and energy prices to propel up inflation over the next six months, but as they dampen demand, inflation should return to target,” Nomura stated.

Two hikes, not a full tightening cycle

Nomura anticipates the RBI to mobilize rates by 25 basis points in both October and December, taking the repo rate to a terminal level of 5.75 percent. The brokerage sees these hikes as an attempt to keep inflation expectations anchored rather than the beginning of an aggressive tightening cycle. “Given limited signs of generalization, a full tightening cycle is unlikely,” Nomura stated.

It described the anticipated rate increases as a “preemptive recalibration to anchor expectations” and further noted that “the RBI will do less in this cycle, not more”. Nomura anticipates CPI inflation to average 5.2 percent in FY27 before easing to the RBI’s 4 percent midpoint target in FY28.

Food, energy prices key near-term risk

The brokerage anticipates food and energy prices to stay the main source of inflation pressure over the coming months. That stated, it does not see these pressures translating into a broad-based inflation problem. Instead, Nomura anticipates elevated prices to eventually weaken demand, helping inflation return towards target.

This is a key reason behind its view that the RBI would not need to match the nearly 125 basis points of rate hikes at present priced by markets.

Indian rupee faces near-term pressure

On the currency front, Nomura anticipates the indian rupee to stay supported by a combination of high energy prices, expectations of further US The US central bank hikes and rising US Treasury yields in the near term. Over the medium term, that stated, the brokerage anticipates the indian rupee to underperform the euro.

It cited three factors behind this view: RBI accumulation of US dollars, portfolio flow challenges and pressures from the current account deficit. Nomura additionally anticipates the US dollar to weaken over the medium term.