Nomura projects the RBI will raise the repo rate by 25 basis points each in October and December 2026, taking it from 5.25% to 5.75%, driven by broadening food and energy inflation. CPI is forecast to peak at 6.3% in Q4 2026 before easing. A Reuters poll of 61 economists broadly concurs, with nearly 60% expecting an October hike. Nomura sees the hiking cycle stalling from February 2027 as demand softens and inflation retreats toward the 4% target.

This story is fundamentally about the RBI's inflation-targeting framework under the Flexible Inflation Targeting (FIT) regime, where the Monetary Policy Committee (MPC) must keep CPI inflation within a 2–6% band, with a medium-term target of 4%. When inflation breaches or threatens to breach this band consistently, the MPC's primary instrument is the repo rate — the rate at which RBI lends overnight funds to commercial banks through the Liquidity Adjustment Facility (LAF).

The transmission mechanism works as follows: a repo rate hike raises banks' borrowing costs from RBI, which pushes up lending rates across the economy. Higher borrowing costs dampen credit-financed consumption and investment, reducing aggregate demand and eventually easing inflation. This is called monetary policy transmission.

The dilemma here is the classic growth-inflation trade-off. India's GDP grew at 7.8% YoY in Q2 — above expectations — and credit growth stood at 19.1% in August. Raising rates aggressively risks choking this momentum. But not raising risks inflation becoming entrenched above target, which erodes real incomes and undermines the RBI's credibility as an inflation-targeting central bank.

Nomura's 'short cycle' thesis — two hikes followed by a pause — reflects the view that the current inflation pressure is primarily supply-side (food, monsoon failure, energy), not demand-driven. Supply-side inflation responds poorly to rate hikes; tightening too aggressively in this environment would sacrifice growth without durably reducing prices.

For exam purposes, understand: the MPC's composition (6 members, 3 RBI + 3 external), its voting mechanism, the LAF corridor (repo rate as the policy rate, SDF as the floor, MSF as the ceiling), and how a repo rate change ripples through credit markets, currency, and inflation expectations.