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RBI to Raise Rates by 50 bps by December Before Pausing Says Nomura
- •Nomura predicts the Reserve Bank of India will raise the repo rate by only 50 basis points through December before pausing its tightening cycle.
- •Aurodeep Nandi notes that core inflation is rising but has not yet reached levels requiring aggressive economic slowdown measures.
- •Growth risks such as weak rural activity and global uncertainties will likely prompt the RBI to adopt a balanced approach.
- •Nomura expects a 25-basis-point hike in October followed by another in December, leading to a policy pause.
- •The Indian rupee faces continued pressure from high crude oil prices and foreign outflows, though FCNR deposit inflows provide some support.
Key Questions Answered
Nomura expects the Reserve Bank of India to raise the repo rate by only 50 basis points through December before pausing, which is significantly less than the 125 basis points or more currently priced in by markets. Specifically, Nomura anticipates one 25-basis-point hike in October and another in December.
Nomura's FX strategy team expects the rupee to reach around ₹94 per US dollar by the first quarter of calendar 2027. Factors weighing on the currency include triple-digit crude oil prices, the Iran war, compressed US-India yield differentials, and foreign investor outflows.
Nomura notes that while core inflation is rising, it has not yet reached a point where it is generalizing or indicating broad-based price pressures. Therefore, the central bank does not need to slow the economy down strongly, especially when growth faces risks from weak rural activity, weak monsoons, and elevated base effects.
