India: This RBI cycle is different

RBI monetary policy stands at a critical juncture: India has so far sidestepped the rate hikes seen in other Asian economies, but higher oil prices, a surge in food prices and Fed rate hikes have brought policy to an inflection point. Markets price close to 125bp of hikes over the next one year; our analysis suggests this is excessive and this cycle is different. We assign an 80% probability to a recalibration scenario (25-50bp of fine-tuning) rather than a full tightening cycle (>75bp). India's trend inflation has eased, with a notable fall in the core inflation trend from ~5% to ~3%. Nomura's inflation generalization index stood at 92.6 in August, up from 84.8 in January but below the average mark of 100, confirming no signs of broadening. Our leading index, NICLI, has fallen to 99.8 in Q4 2026 from 100.5 in H1 2026, signalling possible below-trend growth. We forecast CPI inflation at 5.2% in FY27 before easing to the 4.0% midpoint target in FY28. In our baseline, the RBI hikes 25bp