Nomura lists political instability, others as India’s downside risks after slashing GDP forecast

Global firm Nomura has listed political instability and stalled reforms as downside risks to India’s growth. Also, it feels it is time to cut the rate as both growth and inflation numbers have come down.

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The firm has already decreased its forecast to 6.7 per cent for the current fiscal (Fiscal Year 2024-25), from the previous forecast of 6.9 per cent. For the next fiscal (Fiscal Year 2024-26), its forecast for economic growth rate Is 7.2 per cent. The inclusion of political instability and stalled reforms in downside risk has been made at a time when BJP alone failed to achieve a majority mark on its own during the third term. Though the coalition has a majority, there has still been dilution or even rollback in policy announcements with the most recent decision of the Unified Pension System.

In its latest Asia Economic Monthly, the agency noted the growth during the April-June quarter slowing down to 6.7 per cent from 7.8 per cent in the January-March quarter. Talking about the ongoing three-month period (second quarter of FY25 and third quarter of Calendar Year 2025), it said that Early data suggests weaker urban consumption, soft industrial indicators and lower RevEx (Revenue Expenditure), while rural growth and public capex have improved. The eventual reversal of the public spending slump, good monsoons, low inflation and stable public and household investment are likely tailwinds.

“However, urban demand is slowing, real rural wage growth continues to contract, the private capex recovery has been uneven, terms-of-trade tailwinds for firms are ebbing and the RBI’s tighter macroprudential measures are starting to bite. That said, India’s strong medium-term growth drivers should ensure GDP growth of 7 per cent, although we see rising downside risks for FY26 as well,” the report with the chapter on India authored with Sonal Varma and Aurodeep Nandi said.

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Further, the report said: “Downside risks to growth are political instability, stalled reforms, sluggish capex, weaker global growth and excess monsoons.” Upside risks include resilient consumer demand and a private capex revival. Oil prices pose two-sided risks, it said.

Talking about monetary policy, the report took note of the Monetary Policy Committee’s resolution to keep the policy rate unchanged as well as the stance of ‘withdrawal of accommodation’. The report while flagging its special report on inflation said, “we expect inflation to sharply undershoot the RBI’s Q3 projection of 4.4 per cent (Nomura: 3.7 per cent), while benign core inflation and softer growth signals should lead to the RBI delivering 100 bp of policy easing (prior forecast: 75bp), starting from its next meeting in October.”

Retail inflation based on the Consumer Price Index (CPI) slipped to 3.5 per cent in July and is expected to drop further in August. Data for August is to be made public next week on the September 12 and it is estimated to be 3.2 per cent. Since it is lower than median rate of 4 per cent of targeted inflation range, the demand is getting a voice for rate cut.