Nomura eyes three US Fed rate cuts in 2024; RBI likely to go its own way

The Japanese brokerage firm Nomura has predicted a total 75 basis points (bp) in rate cuts this year after the significant dovish surprise in the July employment report.

The brokerage firm in a recent report said that the US Federal Reserve may begin rate cuts as early as next month with a 25 bp cut in September, with following rate cuts in November and December of 25 basis points each against an earlier expectation of two rate cuts in  September and December of 25 bp. 

Nomura further said that its analysts do not view the current labour market deterioration as the beginning of a worsening trend, but they acknowledge that the risks are skewed to the downside. “If job losses rise or financial conditions tighten further, the likelihood of 50 basis point cuts could increase,” the report noted. 

Asian Central Banks may follow suit

The reduced Fed policy barrier may lead Asian central banks to adjust their rates, though their responses will depend on local conditions. Central banks in Indonesia, Korea, and the Philippines, which are particularly sensitive to Fed actions and foreign exchange risks, might implement policy easing sooner, according to the report.

“Fed policy easing and lower US yields could lead to earlier rate cuts by Indonesia's Bank Indonesia (BI) and the Philippines' Bangko Sentral ng Pilipinas (BSP). However, Korea's Bank of Korea (BOK) is currently focused on housing price concerns, making an August cut unlikely, though cuts might start from October after addressing household debt,” analysts at Nomura wrote in the report. 

RBI’s status quo may change in Oct

Analysts forecast that the RBI will start easing rates from October. Although the market assumes the RBI closely tracks the Fed due to their synchronised hiking cycles, the brokerage says RBI’s policy decisions will primarily depend on domestic conditions and that the regulator may act independently. 

“Although inflation remains above the target at around 5 per cent due to food price pressures, the RBI’s recent economic assessment suggests that a 4 per cent inflation target is not a prerequisite for a policy shift. With growth slowing and credit growth expected to moderate, we anticipate policy rates will be adjusted lower,” Sonal Varma, Aurodeep Nandi of Nomura said. 

The brokerage further expects the rates to remain unchanged at the August meeting that begin on Tuesday, and projects a 75 basis point reduction in FY25, bringing the terminal rate to 5.75 per cent from 6.5 per cent presently. However, the analysts noted that If global growth slows more rapidly, terminal rates could be even lower.