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Nomura reduces its estimate for India's GDP growth in FY25 to 6.7% and predicts RBI rate cuts starting in October.

Nomura had earlier estimated that India's GDP would increase by 6.9% in FY25. Due to lower Q2 and lackluster signs for Q3, global brokerage Nomura has slashed its FY25 GDP growth estimates for India from 6.9 percent to 6.7 percent. Additionally, Nomura's GDP growth estimates are significantly below than the Reserve Bank of India's 7.2 percent expectation. In the second quarter of FY25, India's GDP (Gross Domestic Product) growth decreased to 6.7 percent year over year, down from 7.8 percent in the previous quarter and just less than the 6.8 percent predicted. As Nomura points out, the main cause of this deceleration was lower government spending during the election season, even if growth in fixed investments and private consumption both went up. Conversely, the growth in GVA (Gross Value Added) increased to 6.8% year over year in Q2 from 6.3 percent in Q1, resulting in a negative GDP-GVA differential. "Early data for Q3 presents a mixed outlook as urban consumption remains weak, industrial indicators are soft, and government revenue expenditure is lower, while rural growth and public capital expenditure are showing signs of improvement," Nomura stated. Nomura has revised its estimate for India's GDP growth for the fiscal year 2024-25, reducing it from its previous projection. The Japanese financial services firm now expects the Indian economy to grow at 6.7% in FY25, down from earlier estimates. This downward revision reflects Nomura's assessment of global and domestic factors that could impact economic growth in the coming year. According to the firm, slowing global demand, coupled with weaker-than-expected domestic consumption and investment, are key reasons behind this more conservative outlook. One of the primary factors influencing this adjustment is the ongoing global economic slowdown, which is likely to affect India's export-driven sectors. The combination of tightening financial conditions globally and a slowdown in major economies like the United States and China could dampen demand for Indian goods and services. Additionally, domestic factors such as rising interest rates and inflationary pressures have also contributed to this revision. Higher borrowing costs are expected to weigh on both consumer spending and private investment, further tempering growth prospects. Nomura also highlighted the impact of rising inflation on consumer spending. With inflation eroding household purchasing power, the firm anticipates a more cautious consumer behavior, which could lead to a slowdown in the growth of consumer demand. This is particularly relevant in the context of high inflationary pressures that have been persistent over the past year, affecting both urban and rural consumption patterns. The combination of these factors is expected to create headwinds for India's GDP growth in the next fiscal year. On the monetary policy front, Nomura predicts that the Reserve Bank of India (RBI) may begin cutting interest rates as early as October 2024. The firm believes that with inflation likely to ease in the latter part of the year, the RBI could shift its focus towards supporting growth. The anticipated rate cuts would mark a significant policy shift after a prolonged period of monetary tightening aimed at containing inflation. Nomura suggests that the central bank's priority may shift towards stimulating economic activity as growth concerns become more prominent. The potential for rate cuts is also linked to Nomura's expectation that inflation will moderate in the second half of the fiscal year. A combination of base effects, lower global commodity prices, and the stabilization of food prices is likely to contribute to this moderation. Should inflation indeed ease, the RBI would have more room to maneuver in terms of lowering rates without jeopardizing its inflation-targeting mandate. This would provide a much-needed boost to the economy, particularly in terms of reducing borrowing costs for businesses and consumers. Nomura's revised GDP growth estimate and its prediction of rate cuts highlight the delicate balancing act that the Indian economy faces in the coming months. While the government has been focusing on maintaining fiscal discipline and promoting investment, the challenges posed by both global and domestic factors cannot be ignored. The outlook underscores the importance of timely policy interventions to sustain economic momentum, especially in a period of heightened uncertainty. In conclusion, as India navigates a complex economic environment, Nomura's projections serve as a reminder of the challenges ahead. The combination of global headwinds, domestic inflationary pressures, and the need for supportive monetary policy will be key factors shaping the country's economic trajectory in FY25. With a growth estimate of 6.7%, it is clear that while India remains on a growth path, the pace may be slower than previously anticipated, requiring careful management of both fiscal and monetary policies.

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