Nomura expects India’s central bank to turn to rate cuts from October as growth weakens

INVESTMENT bank Nomura expects India’s central bank to begin cutting interest rates next month as inflation in the South Asian nation edges lower and economic growth weakens.

Nomura said on Monday (Sep 2) it expects the Reserve Bank of India’s (RBI) rate-setting panel to reduce rates by a total of 100 basis points from October to mid-2025.

This is more than its previous forecast of 75 basis points of rate cuts for the same period.

“We believe that an inflection in India’s monetary policy cycle is around the corner, and it is unlikely to be shallow,” Nomura economists said.

“While the initial easing will realign nominal rates with lower inflation, rate cuts in 2025 will likely be triggered by weaker growth.”

Data released last Friday showed that India’s gross domestic product grew at a slower-than-expected pace of 6.7 per cent on an annual basis in the quarter from April to June. This was due to a fall in government spending during the national elections.

Following the data, Nomura lowered its economic growth forecast for the current fiscal year to 6.7 per cent, from 6.9 per cent a year earlier.

“Overall, second-quarter GDP data are weaker than expected, although the role of transitory factors like elections, versus more persistent factors like slowing profit growth is still unclear,” Nomura said previously.

Even as government spending picks up, lower corporate profit growth and a moderation in credit growth are likely to persist as growth drags, it said.

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The RBI last month kept the key policy rate unchanged for a ninth consecutive meeting amid inflationary pressures. It also maintained its “withdrawal of accommodation” policy stance, with the governor flagging stubborn food inflation.

“High-frequency data show that prices of vegetables, cereals and pulses have already declined sequentially in August. We expect a moderation beyond August too,” Nomura said.

It expects India’s headline inflation to ease further to 3 per cent year on year in August, and average at 3.6 per cent from July to September. This is below the RBI’s inflation target of 4 per cent. REUTERS