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

New Delhi [India], June 5 (ANI): 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)