Mumbai: The Reserve Bank of India (RBI) is likely to raise rates by 25 basis points in both October and December policy review meetings, reaching a terminal rate of 5.75 per cent, according to Japanese brokerage Nomura.
The terminal rate represents the maximum or minimum target rate expected within a tightening or easing cycle, respectively.
The likelihood of interest rate hikes is expected to decline starting in February 2027, driven by anticipated weaker consumer spending and a softer inflation outlook for the coming year.
"The RBI hikes by 25 basis points in each of October and December to a terminal rate of 5.75 per cent, though there is some risk of a one-and-done hike.
"We see the probability of rate hikes diminishing from February 2027 onwards, because of a potential consumption slowdown and a lower year-ahead inflation outlook," global financial services group Nomura said in a report on Tuesday.
On inflation, Nomura expects cyclical pressures from food and energy prices to push up inflation over the next six months, but said that "as they dampen demand, inflation should return to target".
"We expect CPI inflation to rise from 4.8 per cent year-on-year in August to 6.3 per cent in Q4 and around 5.3 per cent in H1 2027, before moderating below 4 per cent in H2 2027," it said.
"On average, we forecast FY27 CPI inflation at 5.2 per cent year-on-year and FY28 at 4 per cent," it said, adding that core CPI inflation is forecast at 4.3 per cent in FY27 and 4 per cent in FY28.
Food inflation, Nomura said, is "the biggest risk to the near-term inflation outlook". Food prices have been rising this year, "exacerbated by deficient monsoons and poor kharif (summer) sowing," as per the report.
"While government policy actions on sugar (stock limit) and onion (selling at lower prices) may temper some of the price increase, lower crop output suggests upside risks to food prices for now," it said.
On growth, Nomura noted that "India's real GDP growth surprised higher at 7.8 per cent y-o-y in Q2", while credit growth was "in double digits (19.1 per cent y-o-y in August)". However, it said, "we see some emerging downside risks to the economic outlook".
"Deficient rains mean an increased likelihood of lower kharif (summer) and rabi (winter) crop output, which would partly weigh on rural consumption," Nomura said, adding that higher food inflation is likely to squeeze real disposable incomes and result in lower consumption demand for discretionary goods.
The brokerage also flagged the impact of AI developments on India's services sector.
India's software-services surplus stood at USD 51.4 billion in Q2 2026, down from a peak of USD 53 billion in Q4 2025, with the surplus falling 2.9 per cent quarter-on-quarter in Q1 and 0.1 per cent in Q2.
"Considering the unfavourable portfolio flow backdrop, the passing of FCNR(B) inflows and high energy prices, financing India's widening current account could prove challenging," Nomura said.