Japanese brokerage Nomura has projected the Reserve Bank of India will 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 Nomura's latest report, 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 brokerage noted that "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." Also, the probability of rate hikes diminishing from February 2027 onwards, because of a potential consumption slowdown and a lower year-ahead inflation outlook, as reported by Business Standard.
Nomura expects 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. According to the brokerage, "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." On average, Nomura forecasts FY27 CPI inflation at 5.2 per cent year-on-year and FY28 at 4 per cent, with core CPI inflation forecast at 4.3 per cent in FY27 and 4 per cent in FY28. 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, as noted by Nomura. Food inflation is 'the biggest risk to the near-term inflation outlook', with deficient rains meaning an increased likelihood of lower kharif and rabi crop output.
India's real GDP growth surprised higher at 7.8 per cent year-on-year in Q2, while credit growth was 'in double digits (19.1 per cent year-on-year in August)', according to Nomura's report. However, the brokerage noted that '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'. Higher food inflation is likely to squeeze real disposable incomes and result in lower consumption demand for discretionary goods, as reported by Business Standard. The impact of AI developments on India's services sector is also flagged, with India's software-services surplus standing at USD 51.4 billion in Q2 2026, down from a peak of USD 53 billion in Q4 2025.
BNP Paribas India has warned that the Reserve Bank of India now has less room to keep interest rates unchanged as India's macro-outlook weakens amid rising global pressures. According to the latest report, India's macro-outlook has weakened in recent weeks as Brent crude rose above $100 per barrel and US 10-year Treasury yields climbed toward 5 per cent. The report notes that rising oil prices and commodity inflation remain a material challenge for India in the near term, with the INR having already depreciated by nearly 1 per cent and the RBI now having less room to keep interest rates unchanged. Inflation continues to rise globally, and central banks are resorting to rate hikes, though India's macro buffers have increased with foreign currency non-resident (FCNR) flows. The latest escalation in the Middle East has pushed Brent above $100 per barrel, while the ECB and BoJ have raised rates by 25 basis points, tightening global financial conditions.
Indian government bonds advanced on Tuesday, ending a four-session slide as the benchmark 6.94% 2036 bond settled at 7.1628%, down 2 basis points from Monday's close. According to The Economic Times, the yield on the benchmark 6.94% 2036 bond was at 7.1679% at noon, down about 2 basis points from Monday's close. Bond yields move inversely to prices, indicating that the recent decline reflects improved investor sentiment. US Treasury yields retreated from multi-year peaks, with the 10-year yield last at 5.21% after briefly breaching 5.26% in Asian trade. "Today buying emerged on several factors, including reports of constructive US-Iran talks and investor demand around the 7.19% level, where the spread over the repo rate has widened to nearly 200 basis points," said Umesh Tulsyan, managing director at Sovereign Global Markets. The improvement came after the benchmark 10-year yield had risen 7 basis points to 7.19% on Monday, marking a historic milestone as the yield reached its highest level since April 2024.
Over the past two weeks, the rupee has depreciated by around 1 per cent, India's 10-year bond yields have breached 7 per cent and foreign institutional investor selling has resumed, as noted by BNP Paribas India. While foreign currency non-resident (FCNR) deposits have bolstered reserves to about $800 billion, supported by roughly $127 billion of FCNR flows, these flows are likely to reverse in 3-5 years. The report warns that high inflation could slow high-frequency indicators in the coming months. "Our discussions with real money managers suggest India bonds may not be attractive here, owing to the narrowing rate differential with the US and the perception that the RBI may be reluctant to hike as much as the market expects," analysts at Nomura said in a note. "Investors still see the relief as fragile. Elevated global yields and oil-driven inflation risks have reinforced expectations that the Reserve Bank of India will raise rates at next week's monetary policy meeting, clouding the outlook for the bond market," according to The Economic Times. However, consumption indicators showed some moderation last month, with urban wages falling, rising inflation, and deteriorating business confidence, while rural dynamics are also weakening because of a monsoon deficit, higher food inflation, and reduced crop sowing.
