While a handful of economists see the six-member RBI monetary policy committee (MPC) members to maintain status quo on policy rate and may instead go in for a cut in cash reserve ratio (CRR) and/or liquidity enhancing measures such as open market operations (OMOs), Nomura India economists see an out-of-consensus 25 basis points (bps) rate cut tomorrow. If the Shaktikanta Das-led RBI committee does so, repo rate would decline to 6.25 per cent.
Nomura said a weaker growth and the benign one-year forward inflation outlook may encourage the policymakers to cut the policy rate. Stock investors would keenly follow the RBI policy outcome on Friday, as Nomura India believes the RBI is likely to lower its forecast of GDP growth and raise its CPI inflation forecasts. Benchmark stock indices climbed 1 per cent each on Thursday.
"In our baseline view, we continue to expect the RBI to deliver 100 bps in cumulative cuts by mid-2025 to a terminal rate of 5.50 per cent, including the cut in December," it said.
Nomura said the growth sacrifice is already significant and monetary policy works with long lags, so a move to neutral policy rates will no longer be sufficient. "We don’t see any policy tradeoffs from lowering rates at this stage. We continue to expect 100 bps in total cuts by mid-2025 to a terminal rate of 5.50 per cent," it said.
Nomura India said the RBI’s primary objective is to maintain price stability or headline CPI at 4 per cent (room for 2 per cent deviation on either side), while keeping in mind the objective of growth.
"We have long held the view that growth sacrifice was on the rise, due to various factors, including the RBI’s tight monetary policy, but comments from the RBI have remained hawkish, focusing on high food price inflation, and this view was further cemented by the high CPI print of 6.2 per cent YoY in October," it said.
Nomura said the sharp slump in GDP growth to 5.4 per cent in Q2 from 6.7 per cent in Q1 is a major setback, even relative to its more cautious expectations. It shows that the weakness in domestic private demand is significant, it said.
The foreign brokerage said early data for October-November suggest some sequential rebound in activity, but a tepid one, and our leading indicators are lower in Q4 FY25, indicating that the economy remains in the midst of a cyclical growth slowdown and that expectations of a sharp growth recovery in H2 FY25 are not supported by data.
"This suggests that GDP growth has already moderated below trend, and should mean placing a higher weight on the growth objective of the mandate," it said.
Nomura said inflation is not broad based. It said while some see a rate cut antithetical to the RBI’s heavy intervention currently to defend a weakening rupee, even without signs of growth stability, pressure on the external sector will continue, as India largely attracts growth capital.
"In addition, the RBI’s heavy unsterilised FX intervention is only tightening banking system liquidity, which is also a negative for growth," Nomura said.
Nuvama Institutional Equities said it does not expect a rate cut yet as rupee is under significant pressure. "A good possibility is there of RBI taking some liquidity-enhancing measures such as OMOs, although chances of a CRR cut are low in our view," it said.
HSBC economists believes the RBI may infuse domestic liquidity via a possible 50 bps CRR cut on December 6 and over the next few months also bring out a host of other instruments to infuse the necessary liquidity. It's time to act, strategically," it said.
"Non-conventional policy tools like liquidity easing could act as a good balancing act, with a CRR reversal to pre-Covid 4 per cent level, implying an infusion of Rs 1.2 lakh crore at a time when core liquidity may steadily move to a deficit ahead with unsterilized FX intervention and CIC leakages. We watch for easing regulatory-lending norms ahead to revitalize the waning credit offtake," Emkay said.