Nomura Says Markets Priced for Excessive 125bps Rate Hike Next Year

Nomura Warns of Overly Aggressive Rate Hike Expectations in Indian Markets

Analysts caution that current market pricing for rate hikes may be excessive, suggesting a more measured approach is warranted.

Current Market Expectations

According to Nomura’s analysis, the markets are currently pricing in approximately 125 basis points (bps) of rate hikes over the next year. However, they argue that this expectation is excessive and not aligned with the current economic indicators. The analysts highlight an 80% probability of a more conservative ‘recalibration’ cycle, which would involve smaller rate increases of 25 to 50 bps, rather than a broader tightening exceeding 75 bps.

Inflation Trends and Their Implications

Nomura points out that while the current disinflationary trend bears some resemblance to the 2016-17 period, the underlying drivers differ significantly. In the past, lower food inflation was a primary factor, whereas the current cycle has seen a notable moderation in core inflation, which has decreased from around 5% to approximately 3%. This shift suggests that inflationary pressures may not be as widespread as previously feared.

Policy Paths Ahead for the RBI

Nomura outlines two potential policy paths for the RBI: a cautious recalibration of 25-50 bps towards neutral levels, or a more aggressive tightening cycle exceeding 75 bps. The analysts assign an 80% probability to the former, indicating that the likelihood of a broad-based tightening cycle is limited. They suggest that a pre-emptive rate hike could be prudent to anchor inflation expectations, particularly in light of the current economic climate.

Food Inflation as a Key Risk Factor

Food prices remain a significant near-term risk to inflation, with Nomura highlighting that while government measures may alleviate some pressures, lower crop outputs could pose upside risks. The analysts expect headline Consumer Price Index (CPI) inflation to rise from 4.8% year-on-year in August to 6.3% in the fourth quarter, before easing to around 5.3% in the first half of 2027. They anticipate that adverse base effects could contribute approximately 0.8 percentage points to headline inflation in October and November.

Key Highlights

• Nomura suggests that markets are pricing in excessive rate hikes of 125 bps over the next year.
• Analysts see an 80% probability of a limited recalibration cycle involving 25-50 bps hikes.
• Current core inflation has moderated to around 3%, differing from previous cycles.
• Food inflation remains a significant risk, with potential upside pressures from lower crop outputs.
• Nomura expects CPI inflation to rise to 6.3% in Q4 before easing to 5.3% in H1 2027.

Investor Note: Investors should monitor the RBI’s upcoming policy decisions closely, as the central bank’s approach to inflation and interest rates will significantly impact market dynamics and economic growth in the coming months.