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Informist, Monday, Sep 2, 2024

 

MUMBAI – The Reserve Bank of India's Monetary Policy Committee would cut its policy rate a cumulative 100 basis points to 5.50% by the middle of 2025, Nomura said in a report today. The rate cuts could begin at the next monetary policy review in October, driven by softer growth signals and inflation falling quicker than the RBI's view, the report said.

 

"Food price inflation is cooling, core inflation remains benign and inflation is already aligned closer to the 4% target," the report said. Nomura was one among only three institutions in an Informist poll to offer a view of an October rate cut in India, following the August monetary policy meeting. The rate-setting panel has held the repo rate at 6.50% for nine straight meetings.

 

In a report on Friday, the brokerage had revised lower its India GDP growth view for 2024-25 (Apr-Mar) to 6.7% from 6.9?rlier. This was after India's GDP grew 6.7% in Apr-Jun, lower than the 6.9% median in an Informist poll and well below the RBI's 7.1% forecast.

 

The report said that the prices of vegetables, cereals, and pulses had declined sequentially in August, according to high-frequency data. Nomura expects consumer price inflation to be lower at 4.1%, below the RBI's projection of 4.5%, for the current financial year ending March.

 

"The current level of household inflation expectations is consistent with inflation of 4-4.5%," Nomura said in its report. To capture the fall in rates, Nomura recommended going long on India's seven-year bond and receiving the non-deliverable overnight indexed swap rate for a 1-year tenor starting in two years.

 

According to the Japanese brokerage's strategists, the risk-reward balance "appears favourable". Nomura's rate as well as growth forecast cut calls come after the Indian economy expanded by a five-quarter low of 6.7% in the first quarter of 2024-25, missing estimates. Multiple members of the Monetary Policy Committee, albeit the non-RBI representatives, have been warning for some time about the "unacceptable growth sacrifice induced by a monetary policy that is excessively restrictive".

 

At its last meeting in early August, the committee voted 4-2 to leave the repo rate unchanged at 6.50%, with the two members in the minority calling for a 25-basis-point rate cut.

 

While GDP growth is seen declining in 2024-25 (Apr-Mar), Nomura economists are of the opinion that the drivers of India's medium-term growth as well as the fundamentals are "robust". In conjunction with continued reforms, this should result in a GDP growth rate of 7.2% in 2025-26, although downside risks are on the rise.

 

As such, Nomura expects a "policy pivot" next month from the RBI. "We expect the RBI to deliver the first cut in October, ahead of consensus expectations of December or later, with 75 bps of cumulative easing in 2024-25 (Apr-Mar)," Nomura said.

 

The Monetary Policy Committee is scheduled to meet on Oct 7-9, with three new external members expected to be in place by then to replace the outgoing Shashanka Bhide, Ashima Goyal, and Jayanth Varma, whose four-year terms end this month.  End

 

Reported by Christina Titus 

Edited by Aditya Sakorkar

 

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