RBI Repo Rate May See Sharp Cut By The End Of 2025, Says Nomura

Nomura expects the Reserve Bank of India to cut the repo rate by a 100 basis points from 6% to 5% by the end of 2025.

The brokerage firm noted an underperformance of both the gross domestic product growth (which sat at 6.2% compared to the RBI's projection of 6.5%) and inflation (which was 3.3% compared to the RBI's target of 4%), in its 'Asia H2 Outlook' report.

Nomura credits this "undershoot" as the reason why it expects the central bank to further reduce policy rates, including the repo rate.

Ahead of Friday's RBI repo rate decision, it anticipates a rate cut of 25 bps in June, August, October and December 2025.

They noted that their forecast was double that of the analysts' consensus, which is 50 bps.

The firm also sees India sticking to prudent fiscal practices.

"We expect the government to stick to fiscal prudence, while monetary policy does the heavy lifting," the firm said.

Nomura also projected India's GDP growth to face cyclical weakness, with their economists forecasting growth of 6.2% in fiscal 2026, below the RBI's estimate of 6.5%.

It expects the RBI to have more flexibility on the topside in foreign exchange, especially when it comes to USD/INR.

The brokerage estimates that the RBI has drained $100.9 billion in federal exchange reserves since the peak in September 2024, of which $40.2 billion were in spot reserves (to May 16 2025), and $69.7 billion (to March 2025) were via forwards.

"Given the significant drainage, the RBI is likely to accumulate reserves on a softer US dollar, capping the Indian rupee appreciation," Nomura said in the report.

The company also reported seeing below-trend growth in the GDP.

"Our proprietary Nomura India Composite Leading Index has been steadily moderating (slowing momentum) and has been below the 100 threshold since the fourth quarter of 2024, which points to belowtrend growth," the report said.

Slower Growth In FY26

Nomura named the following reasons for the cyclical weakness:

1. Weak urban consumption demand: The brokerage noted the urban consumption demand to remain weak.

"Credit growth is moderating and real income growth has been tepid amid higher household balance sheet stress," the report said.

They also observed conflicting signals in rural growth indicators with an uneven pace of growth despite seeing improvement. They also saw a decline in farming terms of trade over the past few months.

2. Increased global uncertainty: Below par domestic demand and the high volume of Chinese imports reduce the possibility of a private capital expenditure recovery, according to the firm.

3. Slowdown in global growth: They expect the slowdown in global growth to impact merchandise export growth, especially after the ongoing frontloading fades.