RBI growth estimate “too optimistic”, will pivot to rate cuts in October: Nomura

On Friday April 7, 2023, Japanese brokerage Nomura said that Reserve Bank's 6.5 % real GDP growth estimate for FY24 is "too optimistic", and the central bank will pivot to rate cuts from October.

The brokerage said it agrees with the Reserve Bank's projections on price rise, and that the worst of headline inflation is behind us. "However, the revised GDP growth forecast of 6.5% in FY24 appears too optimistic," the brokerage said, and that it estimates growth to slow down to 5.3%.

A slew of agencies and analysts has cut the FY24 growth forecasts in the recent past, with many of them pegging it under 6 per cent as well. Nomura said it expects a downside of over 1 percentage point to the RBI's growth estimate on weaker global growth, high uncertainty and the lagged effects of domestic policy tightening.

The RBI had attributed the upward revision in growth to a dip in crude oil prices to 85 USD per barrel as against 90 USD per barrel. After announcing the policy, Governor Shaktikanta Das on Thursday said that the policy call is a pause on rates, and not a pivot, and made it clear that the RBI will not hesitate to act if it sees any risks.

In the note, the brokerage said that the RBI is likely to pause in June as well, saying the central bank will take time to assess the impact of its past rates hikes, where it has raised rates by 2.50 per cent in the last 11 months.

"Beyond June, we expect inflation to marginally undershoot and a more significant disappointment on growth," the brokerage said. The risks to its estimate of a rate cut in October appear skewed towards an action earlier than expected, it said.

The brokerage said the six-member Monetary Policy Committee surprised markets by unanimously voting to pause in the April meeting, while retaining its stance at a "withdrawal of accommodation" on Thursday.