Nomura expects the Reserve Bank of India (RBI) to begin an aggressive rate-cutting cycle, with the first cut likely to be announced on the RBI policy date of December 6.
Aurodeep Nandi, India Economist at Nomura, expects RBI to announce a 25 basis points repo rate cut and a 50 basis points Cash Reserve Ratio (CRR) cut on December 6 to address the economic slowdown and infuse liquidity.
Nandi explained that these steps aim to address India’s cyclical economic slowdown.
“When your forward looking (inflation) forecast is pretty well anchored at 4-4.5%, and the GDP print that we got of 5.4% is pretty shocking when India’s trend growth is 6-7%. That is not normal. This means that not only does the RBI need to downgrade its GDP forecast for FY25 which is at 7.2% currently, but also reassess its confidence on the growth cycle. This is the time to do the rate cut, because monetary policy has to be forward looking,” he said.
The repo rate cut would tackle the ongoing demand slowdown, while the CRR cut is expected to inject durable liquidity into the system following significant forex interventions.
Nomura has downgraded its GDP growth forecast for 2024-25 (FY25) to 6% and 2025-26 (FY26) to 5.9%, citing multiple headwinds.
Urban demand has weakened post-pandemic, and the RBI’s macroprudential tightening has slowed credit growth, further impacting consumption.
Global uncertainties, including potential US trade and immigration policies, add to the challenges.
However, rural demand could offer some relief, supported by favourable monsoons.
Private capital expenditure remains muted, and Nandi emphasised the need for a ramp-up in government spending to support economic activity.
While fiscal constraints are less of an issue now, delays in executing capex plans could result in a shortfall of ₹1 trillion from the government’s FY25 target of ₹11.1 trillion.
Despite these challenges, Nandi noted that overall capex this year is still expected to exceed last year’s levels, although slightly below the budgeted 3.4% of GDP.
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