Nomura attributes 7.8% Q1 GDP to low inflation, frontloading of exports

Mumbai: The high economic growth of 7.8 per cent in June quarter should not lead to policy complacency as it is a result of low inflation and export frontloading following the tariff war unleashed by the Trump administration, according to Japanese brokerage Nomura.

The policy response is needed for supporting exporters and boost domestic demand, it said, adding this should include cutting repo rate by 50 basis points to 5 per cent by end of 2025, diversifying exports, fiscal and credit support to impacted exporters and a reform stimulus.

"Our view on the economic cycle remains unchanged, but given the higher Q1FY26 GDP, we are statistically revising our FY26 GDP growth forecast to 6.6 per cent from 6.0 per cent," it added.

The 7.8 per cent GDP growth in June quarter is "not a signal of strong underlying demand", and has been boosted by low deflators and export frontloading, Nomura said.

"We expect the impact of higher tariffs to be visible after September," the brokerage said, adding that growth will slow down sharply from estimated 7.4 per cent in Q2 to 6 per cent in Q3 and go further southward to 5.6 per cent in Q4 of current fiscal.

The official number also "appears at odds" with other high frequency data and demand signals, Nomura added.

Labour-intensive sectors such as textiles, gems and jewellery, household items and seafood which now face an effective trade embargo courtesy the US tariff move, are threatened, and this may lead to second-round effects through job losses, factory shutdowns/relocation and a weaker investment climate.

It said low deflator amid a sustained period of subdued inflation and more frontloading of exports till the higher tariffs of 50 per cent set in by August will give another boost to the GDP in Q2.

While GST cut implementation will lead to some surge in demand in October/November, the fundamental drivers of consumption, jobs and income prospects, suggest soft discretionary demand, the brokerage said, pitching for a multi-pronged policy response.