Nomura’s Call for Policy Recalibration: Balancing Growth and Inflation

Dinesh
2 Min Read

Nomura has made a bold prediction, diverging from the consensus view of no change, by forecasting a 25 basis points (bps) cut in the Reserve Bank of India’s (RBI) repo rate on Friday. This outlook stems from the firm’s assessment of weaker growth and a favorable one-year forward inflation outlook.

Key Reasons Behind Nomura’s Prediction

  1. Absence of Policy Trade-offs:
    Nomura stated, “We don’t see any policy tradeoffs from lowering rates at this stage. We continue to expect 100bps in total cuts by mid-2025, bringing the terminal rate to 5.50%.”
  2. Growth Concerns:
    Nomura, which was among the first to highlight a slowdown in India’s GDP growth, believes that recent economic data justifies a policy shift. The sharp slump in Q2 FY25 GDP growth to 5.4% year-on-year (y-o-y) from 6.7% in Q1 represents a significant setback, even against Nomura’s cautious expectations. This suggests that GDP growth has already moderated below trend levels.
  3. Benign Inflation Outlook:
    Despite the RBI’s continued focus on high food price inflation and a hawkish tone following the October Consumer Price Index (CPI) reading of 6.2% y-o-y, Nomura points to a more favorable forward inflation outlook. This could allow the RBI to prioritize growth without compromising its price stability mandate.
  4. Probability of a Rate Cut:
    According to Nomura, there is a 75% probability of a rate cut on Friday, with only a 25% chance of a policy hold. This marks a notable shift in expectations, as the RBI’s primary objective of maintaining headline CPI within the 4% +/- 2% range aligns more closely with growth concerns at this juncture.

Balancing Growth and Inflation

Nomura argues that the recent economic developments necessitate a recalibration of the RBI’s policy priorities. “We have long held the view that the growth sacrifice was on the rise due to tight monetary policy,” the firm noted. The sharp GDP slowdown underscores the need for placing greater emphasis on supporting economic growth while ensuring inflation remains under control.

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