India monetary policy pivot towards growth around the corner, Nomura says

RBI keeps key repo rate unchanged at 6.5 percent.

India’s monetary policy will shift focus to growth in the near term, while inflation eases going ahead, global brokerage firm Nomura feels.

“We believe that the end of the hiking cycle is approaching, as we expect growth to disappoint the RBI, the forward inflation path to suggest disinflation and because monetary policy works with long lags,” the brokerage said in a note on December 13. "Our base case is a final 25bp rate hike in February to a peak policy rate of 6.50 percent, although this is not a done deal, in our view."

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While a February rate hike remains a close call, beyond February, monetary policy should be on hold, it added.

The remarks come after data showed India's industrial output crashed by 4 percent in October, returning to the sub-zero territory after a gap of just one month and the the worst performance in over two years.

Meanwhile, headline retail inflation rate slumped to an 11-month low of 5.88 percent in November.

Inflation has eased below the 6 percent upper bound of the Reserve Bank of India's 2-6 percent tolerance band for the first time in 2022. But the print remains above the 4 percent target.

While India is the fastest growing G20 economy this year, it faces headwinds from slowing global growth and continued aftereffects of Russia’s invasion of Ukraine. Also, India’s central bank has raised policy rates sharply this year even as it failed to meet its inflation mandate.

Last week, the central bank's rate-setting panel increased the policy repo rate by 35 basis points to 6.25 percent, taking the total quantum of rate hikes to 225 basis points since the start of May.

Nomura predicts that going ahead as growth significantly disappoints, core inflation eases and the Federal Reserve pauses, the Reserve Bank of India will shift its focus entirely towards supporting growth.

The brokerage pencils in 75 basis points of cumulative rate cuts in the second half of 2023, with 25 bps each in August, October and December, which would take the repo rate to 5.75 percent by end of next year.