Policy Action

• The Monetary Policy Committee (MPC) voted unanimously to reduce the policy repo rate by 25 basis points to 5.25%.

• Consequently, the standing deposit facility (SDF) rate reduced to 5.00% and the marginal standing facility (MSF) rate reduced to 5.50%.

• The MPC also retained the “Neutral” stance, though one MPC member voted for an “accommodative stance”.

• The RBI will infuse durable liquidity of around Rs. 1.4 trillion by conducting OMO purchases of Rs. 1 trillion and a three-year Forex buy-sell swap of USD 5 bn in December 2025.

Assessment of Policy Action

The MPC, in its last meeting, had already signalled a scope for a rate cut. So, this time the core policy dilemma was centred around the real need for a rate cut and potential implications for the currency.

Ahead of this policy meeting, the macroeconomic backdrop featured benign inflation, robust growth and a depreciating rupee. The RBI chose to focus on inflation, which has fallen sharply over the last few months and is expected to remain stable.

The decision to cut the rate was based mainly on the benign inflation trajectory. The RBI showed greater confidence in inflation remaining benign at or below 4% in H1FY27 and noted: “The underlying inflation pressures are even lower as the impact of increase in price of precious metals is about 50 basis points (bps)”.

On growth, the RBI took comfort from the continued strength in economic activity and expects GDP growth to remain firm above 6.5%.

The RBI seemed comfortable with current RBI valuations and delinked RBI’s monetary policy with INR depreciation, given the domestic nature of the Indian economy. The governor highlighted healthy services exports and strong remittance receipts, expecting the current account deficit to remain modest. He also noted the strong foreign exchange reserves position of USD 686 billion, more than 11 months of import cover.

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

	CPI Inflation (%)			GDP Growth (%)
	6-Aug-25	1-Oct-25	5-Dec-25	6-Aug-25	1-Oct-25	5-Dec-25
Q1FY26				6.5
Q2FY26	2.1	1.8		6.7	7.0
Q3FY26	3.1	1.8	0.6	6.6	6.4	7.0
Q4FY26	4.4	4.0	2.6	6.3	6.2	6.5
FY26	3.1	2.6	2.0	6.5	6.8	7.3
Q1FY2027	4.9	4.5	3.9	6.7	6.4	6.7
Q2FY2027			4.0			6.8

Source: RBI

Assessment of Inflation

Strong food supply prospects on the back of higher kharif production, healthy rabi sowing, adequate reservoir levels and conducive soil moisture should be supportive for the inflation outlook. The GST rate reduction should continue to put downward pressure on the inflation trajectory in the coming months.

Overall inflationary environment is likely to remain benign over the next few quarters. However, the headline CPI is expected to move up gradually to near 4% by Q2FY27 as the favourable base fades and the one-off impact of the GST rate cut subsides.

Assessment of Growth

Domestic growth drivers like healthy agricultural prospects, continued impact of GST rationalisation, benign inflation, healthy balance sheets of corporates and financial institutions and congenial monetary and financial conditions will continue to support growth. However, external uncertainties continue to pose downside risks to the growth outlook.

Overall growth momentum remains firm, with GDP growth trending between 7.0%-7.5% in the full year FY26 and between 6.5%-7.0% in FY27.

Liquidity Management

The RBI announced to inject durable liquidity to the tune of Rs. 1.45 trillion in the banking system to offset the impact of liquidity outflows from the seasonal cash withdrawals and RBI’s forex interventions, which led to a decline in durable liquidity surplus from ~Rs. 5 trillion in September 2025 to near Rs. 3.6 trillion now.

It announced to conduct open market operation (OMO) purchases of government securities amounting to Rs. 1 trillion and a 3-year USD/INR Buy Sell swaps of USD 5 billion in December 2025.

The RBI reiterated its commitment to provide sufficient durable liquidity to the banking system to further facilitate monetary transmission

Market Outlook

Reinforcing “Lower for longer bias”

With inflation troughing and growth remaining stable, further monetary easing from here looks unlikely. We would expect the RBI to keep the policy rates “lower for longer” and focus on transmission of lower rates into the real economy by keeping liquidity in surplus.

Lower for longer policy setup and OMO purchases by the RBI should be supportive for the short to medium-duration bonds. While the longer maturity bonds might face pressure from the fiscal position of the centre and state governments and the rising duration of state government bonds.

Given the evolving macro and policy backdrop, we maintain:

• Moderate duration exposure, anchored in the up to 3-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 as the terminal rate repricing is now largely in the price; incremental gains appear limited barring growth/inflation shock.

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

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.