Nomura stuck by its contrarian call that the Reserve Bank of India will lower interest rates on Friday as concerns over economic growth overshadow worries about high inflation and the rupee's weakness.
Nomura is one of the five economists surveyed in a Reuters poll that expect the RBI to lower rates by 25 basis points.
The other 62 expect status quo after retail inflation jumped above the RBI's tolerance limit for the first time in over a year and as the rupee plumbs record lows on a regular basis due to portfolio outflows and the dollar's post-U.S. election rally.
Nomura, however, noted that high prices were concentrated in a few items, including food, rather than being broad-based, and that inflation excluding vegetables and other volatile items was still subdued.
The one-year forward inflation outlook is benign, the investment bank said.
On the rupee, Nomura said that without signs of growth stability, the pressure on the external sector would continue, since India largely attracts growth capital, and that would further undermine the currency.
FOCUS ON GROWTH
"The RBI's primary objective is to maintain price stability while keeping in mind the objective of growth," Nomura said.
"We have long held the view that growth sacrifice was on the rise, due to various factors, including the RBI's tight monetary policy."
The Indian economy has lost momentum, with GDP growth slowing to a seven-quarter low in the July-September quarter.
Nonetheless, BofA Securities, which expects the RBI to hold rates, said that while growth is weak, exchange rate considerations will come into play.
"A new dimension to the policy thought process has been the recent outflows in equity markets and pressure on the rupee, which the RBI has managed by heavy intervention," BofA said.
"A sudden weakness in the rupee can bring concerns of financial stability and imported inflation to the fore."
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