RBI Rate Hike Bets Build; Nomura Says 125 bps Pricing Is Excessive

Expectations that the Reserve Bank of India will begin raising interest rates next month are gathering pace, but Japanese brokerage Nomura says financial markets have gone too far in pricing the scale of tightening ahead. In a note reported by Business Standard on Monday, Nomura said markets are pricing in about 125 basis points of rate hikes over the next year, a level it described as excessive.

The RBI’s Monetary Policy Committee is scheduled to meet from 5 to 7 October, its fourth meeting of the 2026-27 financial year. The policy repo rate currently stands at 5.25 per cent, where it has been held through four consecutive meetings. In August, the committee kept the rate unchanged and retained a neutral stance.

Nomura’s case for a milder cycle

Nomura’s base case is for two quarter-point increases, one in October and another in December, which would take the repo rate to 5.75 per cent. It assigns an 80 per cent probability to what it calls a “recalibration cycle” of 25 to 50 basis points, rather than a sustained tightening of more than 75 basis points. The brokerage expects the odds of further hikes to fall sharply from February 2027.

The reasoning rests on the composition of inflation. According to the note, core inflation, which strips out volatile food and fuel prices, has eased from about 5 per cent to around 3 per cent. Nomura expects headline consumer price inflation to rise to 6.3 per cent in the October-December quarter of 2026, moderate to 5.3 per cent in the first half of 2027 and slip below 4 per cent in the second half of that year. Food prices remain the biggest risk, and the brokerage estimated that unfavourable base effects could add 0.8 percentage point to headline inflation in October and November.

In other words, Nomura sees the current inflation spike as driven largely by supply-side factors that should fade, which argues for a limited response from the central bank rather than an aggressive one.

Other economists lean the same way

Nomura is not alone in expecting a move in October. HSBC’s chief India economist Pranjul Bhandari has maintained her long-held forecast of two 25-basis-point increases at the October and December meetings, which would also take the repo rate to 5.75 per cent, according to a report by IANS. DBS Bank senior economist Radhika Rao has pointed to tighter liquidity conditions and a rupee trading near 95 to the dollar as factors shaping the policy outlook.

The central bank has already been tightening in practice, if not in name. It has been draining surplus cash from the banking system through open market operations, variable rate reverse repo auctions and foreign exchange swaps. Surplus liquidity has fallen below ₹5 lakh crore from a peak of ₹10 lakh crore to ₹11 lakh crore, bringing the weighted average call rate, the rate at which banks lend to each other overnight, closer to the repo rate. That shift has already pushed up short-term borrowing costs for banks and companies.

The external backdrop

The pressure on the RBI has been building from outside India. Brent crude traded around $106 a barrel on Monday after US President Donald Trump rejected an Iranian peace proposal, and US 10-year Treasury yields have climbed to about 5.2 per cent. The rupee opened at 95.86 against the dollar on Monday. A weaker currency raises the cost of imported goods, from oil to electronics, and feeds through to domestic prices.

Foreign portfolio investors have also been sellers of Indian equities, withdrawing ₹17,131 crore so far in September. Higher domestic rates could, at the margin, make Indian debt more attractive to overseas investors and support the currency, which is one reason economists see a hike as likely despite slowing core inflation.

Why it matters

An October increase would mark the end of the easing cycle and the RBI’s first rate hike in several years. For borrowers, it would mean higher equated monthly instalments on floating-rate home, vehicle and personal loans, since most such loans are linked to external benchmarks such as the repo rate. Banks could see a short-term lift in net interest margins as loan yields reset faster than deposit costs, though a slowdown in credit demand would offset some of that benefit.

For bond investors, the gap between Nomura’s view and market pricing is significant. If the RBI delivers only 50 basis points in this cycle, as Nomura expects, government bond yields that have priced in far more could rally. Conversely, a more hawkish tone from the committee in October would validate current pricing and keep pressure on bond prices, rate-sensitive stocks and sectors such as real estate, automobiles and non-banking financial companies.

Companies planning capital expenditure will also be watching closely. A predictable, measured path of rate increases is easier to plan around than a steep one, and the RBI’s guidance on how far it intends to go may matter as much as the October decision itself.

What happens next

The committee’s decision is due on 7 October. Before then, the data flow will be closely tracked, particularly food prices, the movement of crude oil following this week’s expected US-Iran talks, and the rupee’s trajectory. The RBI’s updated inflation and growth projections, and any change in the policy stance from neutral, will offer the clearest signal of whether October is the start of a brief recalibration or a longer tightening campaign.

The next policy meeting after that falls in December, which is where both Nomura and HSBC expect the second increase of the cycle.