Nomura: India’s GDP May Fall Below 6%, Know Key Details

As the Reserve Bank of India reduced the repo rate by 25 bps, Nomura, a rating agency, called the policy decision ‘dovish’. To put things into perspective, the brokerage firm slashed its terminal rate forecast to 5% from 5.50%, which implies an additional 100 bps in rate cuts by end-2025. Nomura said, “We have long held the view that this easing cycle was not shallow and terminal rates would settle around neutral (~5.5 per cent). However, with growth below potential, falling oil prices and inflation durably aligned to target, policy rates will need to move into the accommodative zone. Hence, we are lowering our terminal rate forecast to 5.00 per cent (from 5.50 per cent), which implies an additional 100bp in rate cuts by end-2025 (25bp in each of the consecutive meetings in June, August, October and December).”

Following the three-day MPC meeting, RBI Governor Sanjay Malhotra clearly expressed that the accommodative stance signals lower or stable policy rates and is not linked to liquidity,

which is a break from the muddled messaging over policy stance in the past. He had said, “With respect to the policy rate, which is the mandate of the MPC, today’s change in stance from ‘neutral’ to ‘accommodative’ means that going forward, absent any shocks, the MPC is considering only two options – status quo or a rate cut. Let me also clarify that the stance should not be directly associated with liquidity conditions.”

Furthermore, on GDP growth projections, Nomura said, “We believe the RBI’s forecasts are optimistic, despite the downgrade to 6.5 per cent for FY26.” The brokerage firm also downgraded its FY26 GDP growth forecast to 5.8% from 6%.

RBI’s policy stance

The central bank unanimously voted (6-0) to cut the policy repo rate for the second consecutive time by 25 bps to 6.00%. The MPC attributed the dovish outturn to a “decisive improvement” in the inflation outlook and enhanced confidence of a “durable alignment” with the 4% inflation target.

“While the RBI’s 25bp cut of the repo rate and the lowering of the GDP growth outlook was in line with our expectations, the change of stance to accommodative, combined with the trimming of the inflation outlook was a positive surprise,” Nomura said while lowering its terminal rate forecast to 5.00 per cent (from 5.50 per cent), which implies an additional 100bp in rate cuts by end-2025. “The barrage of liquidity injections, policy rate easing, the change of stance to accommodative, and the downgrade of both growth and inflation forecasts, also suggest that the RBI is signaling that a deeper rate cut cycle is in the works, and it wants faster transmission via its commitment on surplus liquidity,” the brokerage firm added.