RBI May Turn Dovish, Signal Rate Cuts from August: Nomura

The Reserve Bank of India (RBI) may shift its monetary policy stance to neutral by June and deliver rate cuts starting August this year, according to a report by Japanese brokerage Nomura.

Softer Core Inflation

Nomura pointed to the softer core inflation, or price rise in items excluding food and fuel, in the data released for December. The brokerage believes that this indicates a need for the policy to pivot towards an easier regime after the extended pause.

Rate Cuts Expected from August

Nomura reiterated its earlier view of rate cuts being expected from August onwards, and pegged the quantum of cuts at 1 percentage point. The brokerage's analysts said, "We expect 1 per cent of rate cuts cumulatively starting August, with a change of stance to neutral in Q2, with risks skewed towards earlier easing."

Core Inflation and Headline Inflation

The core inflation for December came in at 3.8 per cent, according to Nomura's note. The brokerage also noted that the annualized growth of super-core inflation has dipped below 3 per cent by its estimates, which is a positive surprise. For January, the headline inflation is likely to cool off to about 5 per cent, while the core is pegged at 3.5 per cent.

Need for Easier Regime

Nomura believes that there is a need to pivot towards an easier regime. The note suggests that the RBI may opt for making the liquidity less tight, change stance to neutral, and also deliver on the rate cuts as part of this.

Softer CPI Data

Overall, the December CPI data were softer than expected, with the incremental pick-up driven by a rise in some food categories. Core inflation remains largely contained and underlying measures suggest continued softness, according to Nomura. The brokerage added that there are calmer waters ahead.

Risks to Growth

The note also cautioned that even though growth is strong for now, there is a need to watch out for risks going ahead.

The Reserve Bank of India's decision on monetary policy will be closely watched by markets and businesses in India. The central bank's shift to a neutral stance and potential rate cuts could have a significant impact on the economy and financial markets.