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Key Points

The Reserve Bank of India is poised to implement a 25 basis point rate cut to stimulate economic growth amid weakening demand signals. Economic indicators like credit growth, auto sales, and household wages are showing signs of deceleration, while inflation remains soft. Experts anticipate the central bank will gradually reduce rates to support the economy, with a potential target range of 5-5.25%. Despite modest corporate profit growth and improved liquidity, a quick economic recovery remains uncertain due to tightening fiscal policies and uncertain export prospects.

Key Points: RBI Set for 25bps Rate Cut Amid Slowing Economic Demand

  • RBI likely to reduce repo rate to 5-5.25% range
  • Economic demand showing signs of fatigue
  • Corporate profits grow modestly at 10%
  • Liquidity conditions improving in financial system
3 min read

Amid demand showing signs of fatigue and Capex slowdown, RBI to go for 25bps rate cut: Nuvama

Nuvama predicts RBI rate cut to support growth as economic indicators show softening demand and easing inflation

"We anticipate the MPC to cut rate by 25bp and potentially guide for more cuts - Nuvama Research Report"

New Delhi, June 5

Global outlook remains clouded because of the uncertain policy environment and elevated interest rate. In India, too, demand is showing signs of fatigue. However, corporates continue to generate healthy cash flows, but subdued demand has led to a slowdown in both capital expenditure and operational spending. But the RBI's record dividend of Rs 2.69 lakh crore has given ample room to the government for fiscal support.

Against this backdrop, a report by Nuvama says the Reserve Bank of India (RBI) should go for a 25 basis point repo rate cut to support growth.

The report mentioned, "We anticipate the MPC to cut rate by 25bp and potentially guide for more cuts. Demand conditions continue to often, as seen in slowing credit growth, auto sales, RE sales and HH wages, while inflation too has turned quite soft, hovering below 4 per cent on a 3MMA basis, both at the headline and core (ex-commodities) levels."

The report adds that over a period of time, the repo rate is likely to decline to the 5-5.25 per cent range. "The trajectory of easing will be important to monitor, and we expect the repo rate to decline to the 5-5.25% range over the course of this cycle"

It further added, "Besides, the BoP dynamic has turned quite benign amid softening USD. Thus, there is ample need and room to lower rates. Meanwhile, liquidity conditions continue to ease with durable liquidity now in ample surplus, which should aid transmission. Yet, a quick turnaround in demand is unlikely as the fiscal policy is tightening and the export outlook is uncertain. The RBI's guidance will be keenly watched."

Experts also believe that the central bank may reduce the repo rate by 0.25 per cent and signal more cuts ahead, while continuing its "accommodative" policy stance to support the economy.

Globally, high interest rates and uncertain policies are affecting growth. In India, demand is weakening, with key indicators like credit growth, auto and real estate sales, and household wages all showing signs of fatigue.

Despite companies continuing to earn stable profits, investments and operational spending have slowed. Capital expenditure for the second half of FY25 rose just 6 per cent year-on-year. Meanwhile, the government is not increasing its spending, and private sector investments are not going up, which limits support for the economy from that side as well.

Liquidity in the financial system has improved, which will help lower interest rates reach businesses and consumers. However, a quick recovery in demand is not expected, especially with a tightening fiscal policy and uncertain export prospects. Therefore, the pace and direction of the RBI's rate cuts will be closely watched.

Recent data from Q4 FY25 shows modest growth in company profits. The BSE500 (excluding oil marketing companies) reported a 10 per cent rise in profit after tax (PAT), up slightly from 8 per cent in the previous quarter.

The increase came mainly from cost-cutting efforts, as wage growth slowed to just 5 per cent. Sectors like metals, telecom, chemicals, and cement saw stronger profits, while public sector banks and industrial firms saw weaker earnings.

- ANI

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Reader Comments

R
Rajesh K.
Finally some good news! A rate cut will help my home loan EMI. The real estate market has been sluggish in Bangalore, maybe this will give it a boost. But I hope RBI doesn't cut too aggressively - inflation could come back to bite us later. 🏠
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Priya M.
As a small business owner in Pune, I welcome this move. Our working capital costs have been pinching hard. But will banks actually pass on the rate cuts to borrowers? Last time, the transmission was very slow. RBI should ensure benefits reach ground level.
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Amit S.
The government should use the RBI dividend wisely - invest in infrastructure rather than populist schemes. Our manufacturing sector needs better logistics to compete globally. Rate cuts alone won't solve the demand problem.
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Sunita R.
I'm concerned about fixed deposit returns. Senior citizens like me depend on interest income. If rates keep falling, how will we manage rising medical costs? RBI must balance growth with savers' interests too.
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Vikram J.
The auto sector slowdown is worrying - I work at a component manufacturing unit in Chennai. We've had to reduce shifts. Hope this rate cut revives consumer spending on big-ticket items. But export markets remain weak, so domestic demand is crucial.
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Neha T.
Interesting analysis. The 25bps cut seems measured - not too aggressive to risk inflation, but enough to signal support. The real test will be whether this translates to job creation. Youth unemployment is still too high in our country.

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