Rate Action

The MPC (Monetary Policy Committee) headed by Sanjay Malhotra, Governor of the Reserve Bank of India, unanimously voted to reduce the repo rate by 25bps to 6%. Consequently, the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) were retuned to 5.75% and 6.25%, respectively. All six members voted to shift the stance to “accommodative”. The policy was more dovish than market expectations.

Assessment of Policy Action

 1) Rate Cut Rationale: The MPC noted a decisive improvement in the inflation outlook and greater confidence in a durable alignment of headline inflation with the target of 4% over a 12-month horizon. Meanwhile, the weaker growth outlook, constrained by external headwinds impeded by a challenging global environment, still requires policy support.

2) Policy stance shifted to “accommodative”: The RBI Governor highlighted that the stance of monetary policy is intended to serve as forward guidance on the anticipated trajectory of policy rates. The shift to an
“accommodative” stance reflects a strategic orientation towards fostering robust economic activity through softer interest rates. This approach probably signals RBI’s assessment of a prevailing negative output gap and its intention to sustain accommodative conditions to support a revival in growth momentum.

Furthermore, the Governor clarified that the RBI wants to decouple its liquidity stance from the policy stance, underscoring that liquidity operations will be employed as an independent tool to enhance the effectiveness of monetary policy transmission.

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

	CPI Inflation (%)			GDP Growth (%)
	6-Dec-24	7-Feb-25	9-Apr-25	6-Dec-24	7-Feb-25	9-Apr-25
Q1FY26	4.6	4.5	3.6	6.9	6.7	6.5
Q2FY26	4.0	4.0	3.9	7.3	7.0	6.7
Q3FY26		3.8	3.8		6.5	6.6
Q4FY26		4.2	4.4		6.5	6.3
FY2026		4.2	4.0		6.7	6.5

Source: RBI, A - Actual

RBI’s comments on the economy and liquidity in today’s policy were:

1) Inflation: “Decisively positive”: The MPC noted that the outlook for inflation—driven by a sharp fall in food inflation—has turned favourable. Record wheat output and higher pulse production alongside robust kharif arrivals signal durable disinflationary momentum in the food inflation basket. RBI also took comfort from the fall in their three-month and one-year inflation expectations survey as an additional signal of subdued inflation expectations. The inflation estimates were lowered from 4.2% to 4.0%.

 2) Growth: “Downside risks”: Growth projections for FY 2026 reduced to 6.5% from 6.7%, considering the recent global trade and related policy uncertainties. The RBI Governor highlighted that downside risks to growth would emanate from:

a)  a weaker business investment cycle due to increased uncertainty

b) deceleration in global trade due to friction

c) a decline in merchandise exports

However, he expects strong rural consumption, government infrastructure spending and resilient service exports to partially offset the headwinds from global disruptions.

 3) Liquidity:

The RBI Governor mentioned that the interbank liquidity should not be linked to monetary policy stance. He also reiterated that sufficient liquidity will be provided to the banking system to ensure monetary policy transmission. The expectation is to keep the liquidity surplus between 0.5%-1% of NDTL and even increase the surplus to ensure the transmission.

Barring any major FX outflows, we expect the banking system liquidity to move to more than Rs. 3 trillion liquidity surplus by the end of 1QFY26 upon expected spending of RBI dividend. Hence, further OMOs (Open Market Operations) may not be required.

Market Outlook

Position for Softer Monetary Landscape

The evolving macroeconomic backdrop suggests a supportive environment for incremental monetary easing and duration strategies in portfolios. We expect additional rate cuts of at least 50bps during the current rate cycle. Our view is driven by the benign inflation trajectory, adverse external environment and weaker domestic economic momentum as the leverage-driven domestic consumption continues to slow down.

As we mentioned in our 2025 outlook, this year’s macro environment will remain volatile, presenting compelling investment opportunities.

The favourable confluence of easing policy rates, slowing growth momentum and benign domestic inflation make a case for increasing exposure to duration strategies in fixed-income allocations. We have had a long-standing view that rate cuts along with liquidity support would lead to a steepness of the yield curve that has been playing out. We expect further steepness, which offers attractive entry points for investors in sovereign and high-quality portfolios.

Additionally, real interest rates remain elevated by historical averages offering prospects for both accrual and price appreciation as the easing cycle unfolds.

Investors looking at a 6–12-month investment horizon can consider money market or low-duration strategies. Those looking to invest with more than 12 months investment horizon can consider strategies with moderate duration (1-4 years) such as short term and corporate bond funds.

 

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.