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Informist, Monday, Dec. 16, 2024

 

--Nomura:See India GDP growth sharply slowing down to 5.8 25 vs 6.5 24 

--Nomura: Slow GDP growth may result in 100 bps repo rate cut by RBI in 2025 

--Nomura: Domestic demand may disappoint on lagged effect of tight policy 

MUMBAI – Nomura expects India's GDP growth to moderate to 5.8% on year in 2025, lower than the consensus estimate of 6.7%, the broking firm said in its latest global macroeconomic outlook.

 

India's GDP growth in Jul-Sept dropped to 5.4% on year, and the firm anticipates sub-6% growth readings in the upcoming quarters as well. "The Reserve Bank of India has so far strongly resisted the view that a more protracted slowdown is underway, instead asserting that growth is on the mend regardless of the shock GDP growth slump in Q3 2024 (Jul-Sept) to 5.4%, hence obviating the need for any policy easing," the firm said in its report.

 

Nomura believes this deceleration, combined with softer inflation and muted second-round effects, could prompt the RBI to adopt a deeper rate-cutting cycle of 100 basis points starting February. This outlook diverges significantly from the broader consensus, which expects rate cuts of just 50 bps in 2025.

Nomura argues that the RBI's tight monetary policy is deepening the cyclical slowdown. The central bank's decision to maintain elevated real rates even as the economy shows signs of losing momentum may delay the recovery. "We have long held the view that growth sacrifice has been on the rise, due to the RBI's tight monetary and credit policy, and we had called for policy easing in the run-up to both the October and December policy meetings," the broking firm stated. "However, the RBI is adamant in its stance and does not appear to be acknowledging the growth slowdown. Keeping real rates elevated while the economy is losing steam is likely to deepen the cyclical slowdown."

 

At its December policy meeting, the central bank kept rates unchanged at 6.50%, but revised downwards its 2024-25 (Apr-Mar) GDP growth projection to 6.6%, from 7.2?rlier. The RBI also raised the CPI inflation forecast for FY25 to 4.8%.

 

Nomura expects the RBI to begin its easing cycle with a 25-50 bps rate cut in February, culminating in a cumulative reduction of 100 bps to a terminal rate of 5.50%. The firm warned that delaying policy adjustments could lead to more aggressive measures, such as larger cuts or even inter-meeting actions. This prediction contrasts sharply with the consensus view of only 50 bps of cuts in 2025.

 

Nomura projects India's headline CPI inflation to moderate to 4.5% on year in 2025 from 4.9% in 2024. The easing is expected to continue into 2025-26 (Apr-Mar), with inflation dropping to 4.3%, supported by robust crop production and subdued core inflation. Core inflation is likely to stay around 3.5%, reflecting benign manufacturing input costs and limited second-round effects from price increases.

 

While food inflation is expected to ease, Nomura cautions that unforeseen surges in food or global commodity prices could disrupt this trajectory. The report also notes that domestic demand is likely to be disappointing in 2025 due to the lagged effects of tight monetary policy, higher credit costs, and slowing urban consumption. However, rural demand could remain resilient, providing some counterbalance.

 

India's twin deficits--the fiscal deficit and current account deficit--remain manageable, Nomura said. The current account deficit is projected to remain flat at 1.3% of GDP in FY26, supported by a strong services trade surplus and remittance inflows. However, weak domestic demand could put pressure on capital flows, with the basic balance of payments expected to remain negative.

 

On the fiscal front, Nomura believes the government is on track to meet its FY25 fiscal deficit target of 4.9% of GDP. By FY26, it expects the deficit to drop further to below 4.5% as the government shifts from fiscal deficit targeting to debt targeting. This new fiscal framework aims to reduce central government debt from 58% of the GDP in FY24 to below 50% in the medium term, assuming nominal GDP growth of around 10%.

 

Nomura also highlights concerns over rising credit delinquencies, particularly in unsecured loans like credit cards and personal loans, which could further tighten household credit conditions. This could weigh on urban consumption and financial services growth.

 

Despite these challenges, the firm has identified potential growth drivers that could help cushion the slowdown. Rural demand is one such buffer, with favourable monsoons and reduced inflation expected to support consumption in agricultural regions. Additionally, India stands to benefit from global shifts in supply chains as companies diversify away from China. This trend is complemented by the rapid expansion of India's Global Capability Centres, increasing demand for offshoring services and stricter work visa policies in developed economies, the broking firm said in its report.

 

On India's medium-term prospects, Nomura remains bullish, particularly in its fixed-income markets. It expects the Indian bond market to outperform the one in the US in the coming months, driven by fiscal consolidation and supportive demand-supply dynamics.

 

Nomura's analysis underscores a challenging year ahead for India, marked by slowing growth, tight credit conditions, and cautious monetary policy. While risks persist, including delayed easing by the RBI and external shocks, there are opportunities as well for India to leverage rural resilience, supply chain diversification, and services offshoring, according to its report.  End

 

Reported by Sachi Pandey

Edited by Rajeev Pai

 

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