With the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announcing a consecutive second cut of 25 bps in the key interest rate, Nomura said that the policy decision was ‘clearly dovish’. To add to this, the brokerage firm lowered its terminal rate forecast to 5.00 per cent (from 5.50 per cent), 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).”
After the three-day MPC meeting, RBI Governor Sanjay Malhotra clearly communicated 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 downgraded its FY26 GDP growth forecast to 5.8 per cent (from 6.0 per cent).
Rate cut + accommodative stance = A dovish cut
The RBI’s MPC voted unanimously (6-0) to cut the policy repo rate for the second consecutive time by 25bp to 6.00 per cent. There was also a unanimous decision to change the policy stance to ‘accommodative’ from ‘neutral’. The MPC attributed the dovish outturn to a “decisive improvement” in the inflation outlook and enhanced confidence of a “durable alignment” with the 4 per cent inflation target. In the post-policy press conference, the RBI governor noted that he wanted to keep system liquidity around 1 per cent of NDTL (approximately Rs 2.5 trillion). The focus was on making sure the transmission of monetary policy happened quickly and efficiently.
“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 signalling 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.
‘Yes’ on inflation, ‘No’ on growth estimates
The RBI, amid global tariff concerns, reduced its FY26 GDP growth forecast by 0.2pp to 6.5 per cent – the second downgrade (cut from 7.1 per cent at the February meeting). However, Nomura said, “On GDP growth though, we believe the RBI’s forecasts are optimistic, despite the downgrade to 6.5 per cent for FY26. Even before Trump’s reciprocal tariffs, domestic growth drags included weak urban consumption, the uneven rural recovery, tepid private capex, household balance sheet stress and the negative credit impulse. There are opportunities for India from trade diversion and medium-term supply chain shifts, but we expect higher tariffs, uncertainty and negative wealth effects to further weigh on exports, investment and consumer discretionary demand this year.” The brokerage firm downgraded the FY26 GDP growth forecast to 5.8 per cent.
Furthermore, the RBI lowered its FY26 CPI inflation forecast to 4.0 per cent YoY from 4.2 per cent, with inflation likely to remain below the RBI’s 4 per cent target through Q1-Q3 (April-December). Nomura agreed with the central bank’s estimates. “Core inflation pressures remain muted, for both goods and services, due to soft domestic demand and lower wage growth, and lower oil prices are disinflationary. Hence, we expect inflation to remain below 4 per cent in 2025, and see the RBI’s forecast of 4 per cent for FY26 as reasonable,” it said.
Rates strategy
The RBI managed to meet the dovish expectations of the market, by shifting its stance to accommodative and offering a dovish take on the liquidity outlook. INR yields and swaps have moved lower in a steepening manner. On liquidity, the RBI noted how it wants to provide sufficient system liquidity. “There was a clear focus on the transmission of policy to the system, which suggests to us that the RBI wants to see repo/call rates closer to the bottom end of the corridor, which is also in line with our view that above a Rs1 trillion surplus in the banking system, MIBOR will likely be below repo rate,” Nomura said.
In terms of how the RBI will provide more liquidity, Nomura continued to believe that the bar is low for OMO purchases, and expected the RBI to announce another set of auctions for May for around Rs 0.75-1 trillion, which would keep banking system liquidity around Rs 2 trillion.
