In a significant forecast for India's monetary policy trajectory, global financial services major Nomura has projected substantial interest rate cuts by the Reserve Bank of India (RBI) over the next two years. The analysis suggests the central bank has room for aggressive easing, contingent on favorable macroeconomic conditions.
Nomura's Detailed Rate Cut Forecast
According to the report, Nomura expects the RBI to initiate a cumulative rate cut of 125 basis points (bps) in the calendar year 2025. This would be followed by an additional 50 bps reduction in 2026. This forecast hinges on the critical assumption that inflation will align with the RBI's target, providing the necessary policy space.
The brokerage firm anticipates the easing cycle to commence from the second quarter of the 2025 fiscal year (Q2 FY25). The current repo rate, which is the key policy rate at which the RBI lends to commercial banks, stands at 6.5%. A cut of 175 bps over two years would significantly lower borrowing costs across the economy.
Key Drivers and Inflation Outlook
The primary catalyst for this dovish pivot is an expected moderation in inflation. Nomura's analysts believe that consumer price index (CPI) inflation will sustainably move to the 4% target in the second half of the 2024 calendar year. This disinflationary trend is expected to give the RBI Monetary Policy Committee (MPC) the confidence to shift its stance from "withdrawal of accommodation" to a neutral, and then an accommodative, one.
Several factors will influence this timeline. The report highlights that the progress of the 2024 monsoon will be a crucial short-term determinant for food inflation and overall price stability. Furthermore, the policy actions of the US Federal Reserve will also play a role, as significant divergence from global central banks can impact currency stability.
Implications for the Indian Economy
Such a substantial rate cut cycle would have wide-ranging effects. For consumers and businesses, it would translate into lower loan EMIs for homes, vehicles, and personal loans. Reduced borrowing costs are also a boon for corporate investment, potentially spurring capital expenditure and economic growth.
The report underscores that while the room for easing is significant, the RBI's approach will be data-dependent and gradual. The central bank will likely wait for clear and sustained evidence of inflation cooling before making its first move. This cautious approach aims to balance growth objectives with its primary mandate of ensuring price stability.
Nomura's outlook presents an optimistic scenario for India's financial landscape, suggesting that after a prolonged period of high interest rates aimed at taming inflation, a period of monetary easing is on the horizon. This could provide a fresh impetus to economic activity in the coming years.
