Nomura Bullish on India's Macro Outlook for H2 FY25, Predicts Rate Decreases from October

Nomura, a global brokerage firm, anticipates that India's macroeconomic fundamentals will stay robust in the latter half of FY25. This period is expected to be characterized by consistent growth, low underlying inflation, and well-managed fiscal and current account deficits. 

Despite the BJP's election victory being weaker than expected, Nomura does not predict a move towards populist policies. Instead, the firm expects the upcoming July budget to maintain a focus on capital expenditure and fiscal consolidation.

Nomura also points out that the Reserve Bank of India's significant forex reserves will aid in mitigating external spillovers, thereby fostering stability and attracting capital inflows. The firm believes this overall stability will help reduce India's risk premium.

Coming to inflation, Nomura notes a decline in India's consumer price index from 5.7% at the end of FY24 to 4.8% in Q1 of FY25, projecting it to average below 4.5% over the next three quarters.

Although the brokerage identifies higher vegetable prices as a short-term supply-side risk, it anticipates that food inflation will moderate in the future. This expectation is based on the predicted shift from El Niño to La Niña after June, sufficient rice buffer stocks, and reduced pulses inflation resulting from increased production.

Based on that, Nomura also sees India's underlying inflation dynamics as a standout in the global context of sticky inflation.

Regarding the RBI, the brokerage believes that continued growth allows the central bank to maintain its current stance for now. However, with anticipated moderation in inflation and slower credit growth, the RBI is expected to begin easing monetary policy by removing some of the excess tightness. The brokerage forecasts an easing cycle starting in October, with a cumulative reduction of 75 basis points by March 2025.