RBI Monetary Policy: Central Bank Likely To Surprise With 25 Basis Point Rate Cut, Says Nomura

Nomura expects the Reserve Bank of India to announce a 25 basis point repo rate cut in its Dec. 6 Monetary Policy Committee meeting decision announcement, as per its latest report. If the forecast holds true, this would bring the benchmark repo rate down to 6.25%.

While 42 of 49 economists surveyed by Bloomberg anticipate no change, Nomura assigns a 75% probability to its prediction, underscoring its confidence in a pivot towards rate easing. The brokerage further expects100 bps in total cuts by mid-2025, bringing the repo rate to 5.50%.

Why The Sudden Pivot?

Nomura cited a sharp slowdown in India's GDP growth and subdued forward inflation outlook as key drivers for the expected cut. This fiscal's second quarter GDP growth slumped to 5.4% year-on-year, down from 6.7% in the first quarter, pointing to a significant decline in private demand.

"Growth has already moderated below trend," noted Nomura analysts. This warrants placing a higher weight on the RBI's growth mandate over inflation concerns, they added.

Despite October's consumer price inflation hitting 6.2%, Nomura argued that inflation is concentrated in a few categories, such as vegetables and edible oils, while underlying core inflation remains subdued. With 64% of CPI basket items recording inflation below 4%, the brokerage believes the inflation risks are not broad-based.

No Policy Trade-Offs

Nomura dismissed fears that a rate cut could destabilise the rupee or stoke inflation further. Instead, it highlights the RBI's heavy unsterilised forex interventions as tightening liquidity, exacerbating growth challenges. "Without signs of growth stability, external sector pressures will continue," the brokerage stated.

At the upcoming meeting, Nomura expects the RBI to revise its growth forecast down from 7.2% to around 6.5%, while raising its inflation forecast modestly to 4.8%. However, the central bank may project a brighter year-ahead scenario with growth rebounding to 7% and inflation aligning closer to its 4% target.

New Easing Cycle

Nomura views this rate cut as the start of a deeper easing cycle rather than a one-off measure. "The growth sacrifice is already significant, and moving to neutral policy rates won't suffice," it stated, pointing to the necessity of aggressive cuts to stabilise the economy.