RBI Likely To Lower Rates By 75 Bps In FY25, Says Nomura

In the short term, the firm anticipates several challenges that could impact economic performance. These challenges include the need for a widespread recovery in private consumption

Brokerage firm Nomura anticipates that the Reserve Bank of India(RBI) will implement cumulative rate cuts of 75 basis points in FY25, beginning in October. This expectation is based on the combination of slowing underlying inflation and emerging signs of softening growth, which, according to Nomura, strengthens the case for a shift towards policy easing.

Regarding India's GDP growth, the brokerage firm observed a softening trend along with easing inflation. India's GDP growth slowed to 7.8 per cent year-on-year in Q1 FY25, down from 8.6 per cent in the previous quarter. Despite this deceleration, Nomura noted that GDP growth remains robust, supported by fixed investment, positive net exports, and resilient industrial and services sectors.

However, the brokerage also indicated that data for Q2 and preliminary data for Q3 show a potential softening in growth momentum. This is reflected in urban consumption indicators, such as declines in passenger cars and medium and heavy commercial vehicle sales, weaker corporate results, and slowing growth in exports and core imports.

Despite this, Nomura still believes improved rainfall could support a recovery in rural areas. However, they note that rural terms of trade remain low compared to historical averages, and real rural wage growth continues to decline.

In the short term, the firm anticipates several challenges that could impact economic performance. These challenges include the need for a widespread recovery in private consumption and private capital expenditure, which could slow down overall economic growth. 

Additionally, firms are facing diminishing benefits from favourable terms of trade, which could further strain their financial conditions. Another concern is the potential reduction in government spending due to factors related to elections, which might limit fiscal stimulus. Furthermore, the Reserve Bank of India's macroprudential tightening measures could add to the economic pressures.

"However, India’s strong medium-term growth drivers, robust fundamentals, and ongoing reforms are expected to support GDP growth of approximately 7 per cent, with forecasts of 6.9 per cent for FY25 and 7.2 per cent for FY26," the brokerage firm said.