RBI MPC Meeting Starts: Nomura Predicts 100 bps Rate Reduction by 2025
Nomura Anticipates RBI Rate Cuts Amid Economic Challenges
Nomura forecasts that the Reserve Bank of India (RBI) will reduce rates by 100 basis points in 2025, attributing this expectation to sluggish growth and low inflation. This prediction indicates a transition towards a more accommodative monetary policy, with the terminal policy rate expected to drop to 5.00 percent. The RBI’s Monetary Policy Committee (MPC) commenced an important three-day meeting today, June 4.
Market Expectations for Rate Reduction
With the RBI’s MPC meeting starting today, Nomura has projected a 100 basis points (bps) reduction in the repo rate for this year, which is twice the market consensus of 50 bps. This adjustment will lower the terminal policy rate to 5.00 percent. The brokerage firm asserted, “Our prediction of additional 100 bps cuts surpasses the general agreement of 50 bps, and we perceive the potential for further cuts extending into 2026.”
Upcoming Announcements and Policy Shifts
Chaired by RBI Governor Sanjay Malhotra, the committee is set to announce its decisions on Friday, June 6. The anticipation surrounding this bi-monthly monetary policy stems from easing inflation rates and a growing sentiment for a key policy transition coupled with a third consecutive repo rate cut. Current inflation stands below the targeted median of 4 percent, which is critical for fostering growth, especially amid ongoing global uncertainties fueled by tariffs from the US.
Further Rate Cuts on the Horizon
In previous MPC meetings, the central bank lowered the repo rates to 6.0 percent, executing cumulative cuts of 50 bps thus far. Nomura remarked, “We believe there is scope for additional rate cuts, supported by our projection indicating lower-than-expected GDP growth (at 6.2 percent for FY26, versus the RBI’s estimate of 6.5 percent) and inflation (3.3 percent, compared to the target of 4.0 percent).” The firm argued that with growth and inflation both falling short of targets, policy rates should shift towards an accommodative stance rather than remaining neutral. They anticipate a total reduction of 100 bps, with 25 bps cuts scheduled for June, August, October, and December.
Banking Liquidity and Rate Transmission
To enhance the transmission of these changes, the RBI is likely to maintain a surplus in banking system liquidity, estimated at around 1 percent of Net Demand and Time Liabilities (NDTL), indicating that overall monetary conditions may remain supportive.
RBI’s Stance Independent from Federal Reserve Actions
Additionally, the RBI has continuously asserted that its monetary policies are influenced by local economic conditions, rather than external factors like actions from the US Federal Reserve. Nomura also supports this view, predicting rate cuts from the RBI despite their US team’s outlook on stable Fed policy rates through Q4, due to differing macroeconomic conditions and a stable currency.
Current Account Deficit Outlook
India’s current account deficit is anticipated to stay manageable at around 0.6 percent of GDP for FY26, indicating that Balance of Payments (BOP) funding should not pose significant difficulties.
Moderation in GDP Growth Rates
Despite the rise in headline GDP growth to 7.4 percent year-on-year in Q1 2025 from 6.4 percent in the previous quarter, underlying data highlights slowdowns in both private consumption and capital expenditure growth. Nomura identifies a below-trend growth trajectory due to several factors: 1) Weak urban consumption demand, decelerating credit growth, and stagnant real income growth amid household financial distress; 2) Increased global uncertainty that, alongside subdued domestic demand and significant Chinese imports, hampers private capital expenditure recovery; 3) A slowdown in global growth likely dampening merchandise export rates as ongoing frontloading effects diminish.
Positive Economic Counterweights
Nevertheless, there are positive influences such as declining commodity prices, reduced inflation, supportive monetary policy, advantages from trade diversions, and robust service sector performance. Overall, Nomura has revised its projection for GDP growth to 6.2 percent year-on-year for FY26, compared to 6.5 percent for FY25, which remains lower than the RBI’s forecast of 6.5 percent. This revision is a slight increase from their previous estimate of 5.8 percent, reflecting eased US-China trade tensions.
Subdued Inflation Projections
Inflation rates from January to April are averaging just 3.6 percent, primarily due to falling food prices and weak core inflation. Looking ahead, food inflation is expected to further decline based on a strong winter harvest, improved pulse supply, reduced farming costs, and potential favorable monsoon conditions. The negative output gap, lower manufacturing input expenses, and moderating wage growth should keep core inflation in check. “We anticipate that headline Consumer Price Index (CPI) inflation will fall to below 3.0 percent over the next half-year from 3.2 percent year-on-year in April, averaging a modest 3.3 percent in FY26, below both the RBI’s midpoint target of 4 percent and the market consensus of 4 percent. This latest forecast is a decrease from our previous estimate of 3.9 percent, influenced by the drop in food prices,” concluded Nomura.
