The Reserve Bank of India (RBI) is likely to undertake a limited monetary policy tightening cycle rather than the aggressive rate hikes currently being priced in by markets, according to global brokerage Nomura.
In a recent note, Nomura said the RBI's monetary policy stance is at an “inflection point”, with markets currently pricing in nearly 125 basis points of rate hikes over the next one year. However, the brokerage expects the central bank to focus on policy fine-tuning rather than the steep tightening cycle anticipated by investors.
Nomura said India's trend inflation has moderated, while its inflation generalisation index shows no signs of inflationary pressures broadening significantly across the economy. At the same time, its leading indicator is signalling below-trend growth ahead.
The brokerage expects cyclical pressures from food and energy prices to push headline inflation higher over the next six months. However, it believes these pressures could eventually weigh on demand, allowing inflation to moderate and return towards the RBI's target.
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Nomura forecasts consumer price inflation at 5.2% in FY27, before easing towards the RBI's 4% midpoint target in FY28.
“Given limited signs of generalisation, a full tightening cycle is unlikely,” Nomura said.
The brokerage expects the RBI to raise the policy repo rate by 25 basis points each in October and December, taking the terminal rate to 5.75%.
Nomura's view suggests that while near-term inflation risks could prompt the RBI to tighten policy, a prolonged or aggressive hiking cycle may not be warranted if inflationary pressures remain concentrated in food and energy and economic growth loses momentum.
The note comes as market expectations for RBI repo rate hikes have risen sharply following the US Federal Reserve' interest rate hike, with investors pricing a significantly larger tightening cycle over the next year.
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