India’s Q1 GDP Rebound Unlikely to Last, 100 bps Rate Cut Expected by 2025

India's economic growth is likely to pick up in the first quarter of 2025 to 6.7-6.8% as compared to 6.2% recorded in Q4, Nomura said on Wednesday. However, it warns that this rebound may not extend through the year, with the growth outlook for FY26 remaining muted.

In its 'Asia Insights', the global financial services group said that the growth in Q1 of 2025 was led by strong agricultural output and a broad-based expansion in services. However, industrial and investment activity remained sluggish, tempering the overall growth narrative. However, it expected a moderation in growth of private consumption, fixed investment and exports. "But a sharper contraction in import growth should mean a positive contribution from net exports to overall GDP growth," it added.

India’s Q1 2025 growth data are due on 30 May.Even as the growth momentum in Q1 appears positive, it is not enough to carry a full-year outlook. Nomura has estimated that India's gross domestic product (GDP) will moderate to 5.8% in FY26. This marks a sharp decline from an expected 6.2% in FY25. It is also lower than the Reserve Bank of India’s (RBI) projection of 6.5% and the broader market consensus of 6.2%.

"Urban consumption growth remains lackluster and income growth has been tepid in an environment of elevated household balance sheet stress. Credit growth is moderating and the higher global uncertainty and lackluster domestic demand throws a spanner in a sustained private capex recovery. Finally, the tariff tantrum-led slowdown in global growth is also likely to weigh on merchandise export growth, especially after the ongoing frontloading fades," the report explains.

Furthermore, April's economic data also indicated signs of softening. Key indicators such as passenger vehicle and two-wheeler sales remained weak, while GST growth recovered. On the other hand output in core sectors like coal, cement and steel decelerated and MHCV sales growth have weakened in April, which suggests subdued industrial and investment activity.

Given this backdrop, Nomura expects the RBI to continue its easing cycle, projecting an additional 100 basis points of rate cuts by the end of 2025, bringing the policy rate down to 5%.