Nomura expects the Reserve Bank of India (RBI) to raise its policy repo rate by another 25 basis points to 5.75% at its December 2026 meeting, citing persistent inflation risks. The forecast follows the central bank’s October decision to increase the repo rate to 5.50% and shift its policy stance from neutral to “calibrated tightening.” According to Nomura, the latest Monetary Policy Committee (MPC) minutes point to a policy decision driven mainly by growth and inflation rather than an explicit effort to defend the rupee.
The brokerage expects the December increase to be followed by an extended pause, although it considers the February 2027 meeting a potential decision point. The RBI’s minutes show growing concern that higher input costs could spread across the economy and influence inflation expectations. However, policymakers remain divided over how far rates should rise, with some warning that aggressive tightening could weaken consumption and private investment. The December decision will depend on incoming inflation data, the persistence of price pressures and the outlook for economic activity.
Key Takeaways
- Nomura expects another rate hike: The brokerage forecasts a 25-basis-point increase in December, taking the repo rate to 5.75%.
- October’s hike was pre-emptive: Nomura says the move was intended to anchor inflation expectations before price pressures become more widespread.
- Inflation remains the central concern: The RBI raised its FY2026-27 inflation forecast to 5.2%.
- Growth remains resilient: The central bank raised its FY2026-27 GDP growth projection to 7.1%.
- Currency defence is not the main focus in the minutes: Nomura says the MPC discussion centred primarily on growth and inflation.
- Policymakers differ on future tightening: Some favour further action, while others warn against an extended rate-hiking cycle.
- A pause could follow in 2027: Nomura expects an extended pause after December, but says the February meeting remains open.
Why Nomura Expects Another RBI Rate Hike
Nomura’s forecast reflects its assessment that the RBI wants to prevent temporary supply-side shocks from becoming a more persistent inflation problem.
At its October 5–7 meeting, the six-member MPC unanimously raised the repo rate by 25 basis points to 5.50%. The committee also changed its stance from neutral to calibrated tightening. The move was the first increase in the policy rate since February 2023, according to contemporary policy coverage.
Nomura interprets the increase as a pre-emptive adjustment designed to anchor inflation expectations rather than the start of a prolonged campaign to slow economic demand.
The brokerage expects one additional 25-basis-point hike in December. If delivered, that would take the repo rate to 5.75%. It then expects the RBI to hold rates for an extended period as policymakers assess whether inflation moderates and economic growth remains strong.
This remains a forecast, not a confirmed policy decision. The RBI has said that future action will depend on developments in underlying inflation, the spread of price pressures and the strength of demand.
Inflation Risks Are Becoming More Broad-Based
Inflation is the main reason the RBI has shifted toward tighter policy. In its October review, the central bank raised its consumer price index (CPI) inflation forecast for FY2026-27 to 5.2%, from 5.0% previously.
The RBI expects inflation to reach 6.0% in the October–December quarter before easing to 5.7% in the January–March quarter. These projections put inflation near the upper end of the central bank’s 2–6% tolerance range during the third quarter.
| RBI indicator | October 2026 position |
|---|---|
| Current policy repo rate | 5.50% |
| Nomura’s projected December repo rate | 5.75% |
| FY2026-27 CPI inflation forecast | 5.2% |
| FY2026-27 GDP growth forecast | 7.1% |
| Projected Q3 FY2026-27 inflation | 6.0% |
| Projected Q4 FY2026-27 inflation | 5.7% |
Source: RBI October policy review and Nomura’s forecast reported by Moneycontrol. December’s rate remains a forecast.
The MPC minutes also highlighted signs that inflation was spreading beyond a limited group of goods. The share of items in the CPI basket recording inflation above 4% rose to approximately 37% in August, compared with 20% in March. Core inflation, which excludes food and fuel, reached 4.2% in August.
Higher energy and other input costs, weather-related supply disruptions and a deficient monsoon have added to the risks. The central bank is concerned that businesses could pass higher costs on to consumers, while households and firms could begin adjusting their expectations to sustained price increases.
Monetary policy operates with a lag. By raising rates before inflation becomes entrenched, the RBI aims to limit these second-round effects. However, it must also judge whether price increases are temporary supply shocks or evidence of a broader and more persistent inflation problem.
Why the RBI Minutes Focus on Growth and Inflation, Not the Rupee
Currency movements have become an important part of the wider policy debate. RBI Governor Sanjay Malhotra has made comments linking price stability with financial stability, contributing to market speculation that interest rates could be used more aggressively to support the rupee.
Nomura’s reading of the October MPC minutes is different. The brokerage says the discussion was primarily focused on domestic growth and inflation dynamics, with no explicit discussion of currency defence as the reason for the rate increase.
That distinction matters because a rate hike intended to control inflation has a different policy rationale from one intended primarily to influence the exchange rate.
Higher Indian interest rates can affect the relative attractiveness of rupee-denominated assets and capital flows. However, the exchange rate is also influenced by global interest rates, energy prices, investor sentiment and India’s external financing needs.
Nomura argues that interest rates are a blunt instrument for targeting the exchange rate and that using them too aggressively could damage economic growth. The brokerage therefore sees the RBI’s current approach as a measured recalibration of policy rather than evidence of a sustained tightening cycle.
The minutes do not eliminate currency-related concerns. Instead, they suggest that the central bank’s documented policy rationale remains centred on its inflation mandate and the domestic economic outlook.
MPC Members Are Divided Over the Pace of Tightening
Although all six MPC members supported the October rate increase, two members—Nagesh Kumar and Ram Singh—opposed changing the policy stance from neutral to calibrated tightening.
Their concern was not the October increase itself, but the signal that the new stance could send about future rate decisions.
Ram Singh warned that expectations of substantial additional hikes could weaken interest-sensitive consumer spending and private capital expenditure. He favoured incremental increases rather than a prolonged period of high rates.
Other members took a more cautious approach to inflation. Deputy Governor Poonam Gupta said another increase could be necessary to keep inflation low and expectations anchored. Saugata Bhattacharya also highlighted inflation risks and argued that monetary conditions might be too accommodative for price stability.
The disagreement illustrates the RBI’s policy challenge: acting too late could allow inflation expectations to rise, but tightening too much could undermine investment and demand.
The phrase “calibrated tightening” does not commit the central bank to a predetermined series of increases. The RBI has said the pace and extent of future action will depend on actual growth and inflation developments.
What a December Rate Hike Could Mean for Borrowers
If the RBI raises the repo rate to 5.75%, banks could face higher funding costs and may adjust lending and deposit rates. The extent and timing of any change would depend on each bank’s funding position, loan pricing structure and competitive conditions.
Borrowers with floating-rate loans linked to external benchmarks may be more directly affected when lending rates reset. Depending on the loan terms, an increase can raise monthly instalments, extend the repayment period or lead borrowers to pay more interest over the life of the loan.
Fixed-rate borrowers would generally not see an immediate change to their contracted interest rate, although their circumstances could differ when refinancing or taking out a new loan.
For savers, higher policy rates can eventually translate into more attractive deposit rates, but banks do not always pass on changes immediately or equally across products.
A 25-basis-point increase is relatively small in isolation. Its impact becomes more significant if it forms part of a longer tightening cycle. Nomura’s forecast of an extended pause after December suggests that the brokerage does not expect a series of rapid increases, although the RBI has not committed to that path.
The Bigger Picture
The RBI is attempting to contain inflation without undermining India’s growth momentum. Its October decision reflects concern that rising input costs and wider price pressures could become more persistent, even as the economy continues to expand. Nomura’s expected December increase is based on that inflation outlook, not on a stated RBI commitment to defend the rupee through higher rates.
The coming months will test whether inflation eases as projected and whether economic growth can withstand tighter monetary conditions. A further rate increase would bring the repo rate to 5.75%, but the longer-term direction will depend on data rather than the current forecast alone. Differences within the MPC underline that the central bank must balance price stability with the risks of excessive tightening.
FAQs
1. What repo rate does Nomura expect in December 2026?
Nomura expects the RBI to raise the repo rate by 25 basis points, from 5.50% to 5.75%. The decision has not yet been made.
2. Why does Nomura expect another rate hike?
The brokerage cites inflation risks and the need to keep inflation expectations anchored. It views the October increase as a pre-emptive policy adjustment.
3. Is the RBI raising rates mainly to support the rupee?
Nomura says the October MPC minutes focused on growth and inflation rather than currency defence. The rupee remains part of the broader economic backdrop, but the minutes do not identify it as the principal reason for the October hike.
4. What is the RBI’s inflation forecast for FY2026-27?
The RBI raised its CPI inflation forecast to 5.2%. It projects inflation at 6.0% in the October–December quarter and 5.7% in the January–March quarter.
5. Will the RBI keep raising rates in 2027?
Nomura expects an extended pause after a possible December increase, although it says the February 2027 meeting remains a live possibility. The RBI has not committed to this forecast and will assess incoming economic data before deciding.
Looking Ahead
The RBI’s December 2–4, 2026, MPC meeting will be the next major milestone for monetary policy. Investors and borrowers will be watching inflation readings, the pass-through of input costs, the rupee’s performance and signs of resilience or weakness in domestic demand. These indicators will help determine whether another 25-basis-point increase is warranted or whether the committee chooses to pause.
For now, Nomura expects a measured rate cycle rather than sustained aggressive tightening. That outlook could change if inflation broadens more quickly than expected or if global conditions intensify price pressures. The central bank’s key challenge will be to preserve price stability while avoiding unnecessary damage to consumption, investment and economic growth.
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