With the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) starting its crucial three-day meeting today (June 4), Nomura projected a total 100 basis points (bps) cut in repo rate this year, which is double the market consensus of 50 bps. This will bring the terminal policy rate down to 5.00 per cent. “Our forecast for 100bp of further cuts is more than consensus (50bp), and we see risks as skewed towards more cuts in 2026,” the brokerage firm said.
Chaired by RBI Governor Sanjay Malhotra, the committee’s decision will be announced on Friday, June 6, as inflation eases and expectations build for a significant policy shift and a third consecutive cut in the repo rate. The expectation from this bi-monthly monetary policy comes as inflation continues to remain below the median target of 4 per cent, and to push growth amid continued global uncertainty triggered by the US tariff moves.
Room for more rate cuts ahead
In the previous two policy meets, the central bank has lowered the repo rates to 6.0 per cent, having delivered 50bp of cumulative cuts so far. “We see room for more rate cuts ahead, with our forecast pointing to an undershoot on both GDP growth (at 6.2 per cent in FY26 versus RBI’s forecast of 6.5 per cent) and inflation (3.3 per cent versus the target of 4.0 per cent).”
With growth below trend and inflation below target, Nomura opined that policy rates will need to move into the accommodative zone rather than neutral. “As such, we expect an additional 100bp of rate cuts to a terminal rate of 5.00 per cent, with 25bp cuts in each of June, August, October and December,” the brokerage firm said.
Also, in order to enable faster transmission, banking system liquidity is likely to be kept in a surplus, at around 1 per cent of NDTL, which suggests overall monetary conditions are likely to be accommodative.
RBI to stay independent of Fed moves
Further, the RBI has consistently maintained that its monetary policy decisions are guided by domestic economic conditions rather than global cues such as the US Federal Reserve’s actions. In line with this, Nomura also maintained that despite its US team’s forecast for unchanged Fed policy rates until Q4, it seems likely that RBI will cut rates, given diverging macro conditions and a well-behaved currency.
India’s current account deficit is likely to remain contained at approximately 0.6 per cent of GDP in FY26, which means BOP funding should not prove challenging.
Moderation expected on GDP growth
Despite the pickup in headline GDP growth to 7.4 per cent YoY in Q1 2025 from 6.4 per cent in Q4 2024, details show moderations in both private consumption and private capex growth.
Nomura’s analysis points to a below trend growth on: 1) urban consumption demand remains weak, credit growth is moderating and real income growth has been tepid amid higher household balance sheet stress. Even as rural consumption has improved, the pace has been uneven; 2) increased global uncertainty, lackluster domestic demand and the deluge of Chinese imports limit the likelihood of a private capex recovery; 3) a slowdown in global growth is also likely to weigh on merchandise export growth, especially after the ongoing frontloading fades.
That said, it added, there are positive offsets, from lower commodity prices, lower inflation, accommodative monetary policy, benefits from trade diversion and resilience of services.
On net, Nomura penciled in a moderation of GDP growth to 6.2 per cent YoY in FY26 from 6.5 per cent in FY25, below RBI’s forecast (6.5 per cent). “Our latest forecast is slightly higher than our erstwhile forecast of 5.8 per cent, reflecting the latest thaw in US-China trade tensions,” it said.
Inflation to stay subdued
Inflation from January to April is averaging just 3.6 per cent, mainly because of lower food prices and weak core inflation. Going forward, food inflation is expected to ease further due to a good winter harvest, better supply of pulses, lower farming costs, and possibly favourable monsoons. A negative output gap, lower manufacturing input costs and moderating wage growth are likely to keep core inflation under control. “We expect headline CPI inflation to moderate to below 3.0 per cent over the next six months from 3.2 per cent YoY in April, averaging a subdued 3.3 per cent in FY26, below both the RBI’s midpoint target (4 per cent) and consensus (4 per cent). Our latest forecast is lower than our previous forecast of 3.9 per cent, reflecting the fall in food prices,” Nomura concluded.