RBI remains on wait & watch: Leaves door open for easing

Policy Action

• The Monetary Policy Committee (MPC) voted unanimously to keep the policy repo rate unchanged at 5.5%.

• Consequently, the standing deposit facility (SDF) rate remains at 5.25% and the marginal standing facility (MSF) rate remains at 5.75%.

• The MPC also retained the “Neutral” stance.

• CPI Inflation for FY26 reduced to 2.1% and for Q1FY27 reduced to 4.5%.

• GDP growth forecast for FY26 is raised to 6.8% and for Q1FY27 lowered to 6.4%.

Assessment of Policy Action

The RBI remains in wait-and-watch mode to see the transmission of earlier rate cuts. The RBI’s commentary was comparatively dovish this time

acknowledging the broad-based moderation in inflation momentum while highlighting potential risks to growth outlook from global uncertainties and trade tariffs.

The MPC observed that the overall inflation outlook too has turned even more benign in the last few months, due to a sharp decline in food prices and the rationalisation of GST rates. While it revised down the GDP growth projections for Q3FY26 and beyond sighting trade related headwinds, despite being partially offset by the impetus provided by the rationalisation of GST rates.

The Governor also signaled that room for further rate cuts has open-up, but “considered it prudent to wait for the impact of past policy actions to play out and greater clarity to emerge before charting the next course of action”

The Governor reiterated that growth continues to be below the ‘aspirational’ growth rate and argued for coordinated support from fiscal, monetary, regulatory and other public policies.

Below are key RBI estimates on the growth/inflation trajectory into the next year compared to their previous forecasts:

Source: RBI

Assessment of Inflation

Overall inflationary environment is likely to remain favourable over the next few quarters. However, the headline CPI is expected to inch up to 4% and higher in Q4FY26 and in Q1FY27 due to adverse base effect from lower food prices this year. Nevertheless, underlying inflation momentum expected to remain benign below the RBI’s 4% target.

Healthy monsoon and strong sowing activity will be supportive for the inflation outlook. The GST rate reduction, if passed on completely into retail prices, could reduce inflation by around 100 basis points. Assuming a moderate 50% passthrough, we might see a one-time fall headline CPI by 50 basis points. Inflation might also face downward pressure from potential dumping of cheaper foreign goods due to increased tariff barrier in the US.

Assessment of Growth

Domestic growth drivers – above normal monsoon, healthy kharif sowing, strong rural demand, buoyant services sector activity and conducive financial conditions will continue support growth. Growth will get a further boost from GST rate rationalisation.

However, ongoing tariff and trade policy uncertainties, and prolonged geopolitical tensions and volatility in international financial markets might pose risk to the growth outlook. Overall, external risk to India’s growth outlook has increased which led to RBI lowering its future growth forecast.

Liquidity Management

The Governor noted that the comfortable liquidity in the banking system has reinforced transmission of the policy repo rate cuts to the money, bond and credit markets during the current easing cycle. The drawdown of government cash balances and the remaining 75 basis points cut in the cash reserve ratio (CRR) during October-November will aid banking system liquidity in the near-term.

Money market rates have remained relatively stable amidst comfortable liquidity conditions. The RBI guided to actively manage liquidity through two-way operations to anchor short-term rates and facilitate further monetary transmission.

Market Outlook

Reinforcing “Lower for longer bias”

We had opined in our previous policy review that RBI is more likely to hold the policy rate for a longer period of time than look for incremental rate cuts in the absence of any material growth shock.

However, we might see market expectation building up for a rate cut in December monetary policy. This should be supportive for the short to medium duration bonds. While the longer maturity bonds might face pressure from weakening fiscal position of the centre and state governments as well as rising supply of the long duration state government bonds.

Given the evolving macro and policy backdrop, we maintain:

• Moderate duration exposure, anchored in the 2–5 year segment to benefit from roll-down and steepness, especially as short-end rates remain anchored by surplus liquidity.

• Selective credit exposure to well-managed NBFCs, and corporate issuers—supported by benign funding costs and system-level liquidity.

• Cautious stance on long duration due to higher duration supply

For investors, the environment remains supportive of carry-oriented strategies, with curve steepness and credit spreads continuing to offer selective value.

Investors with an investment horizon beyond 2 years can consider Income plus arbitrage funds for tax efficient returns while Investors with more than 12 months investment horizon can consider moderate duration products like short term/corporate bond funds that are well positioned to capitalise on a benign macro backdrop and a liquidity rich environment. Investors looking at a 6–12-month investment horizon can consider money market or low duration strategies.

The views expressed are author’s own views and not necessarily those of UTI Asset Management Company Limited. The views are not an investment advice and investors should obtain their own independent advice before taking a decision to invest in any asset class or instruments.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.