RBI Cut Sets Stage for Lower Yields, Stronger Growth

By – Amit Somani, Deputy Head – Fixed Income, Tata Asset Management.

RBI delivered a 25bps policy rate cut and kept the stance as Neutral. One member, Prof. Ram Singh, was in favor of changing the monetary policy stance from Neutral to Accommodative. FY26 CPI Inflation outlook has been further revised down and is now projected to be at 2.0% from 2.6% in earlier policy. GDP Forecast for FY26 has been revised upwards to 7.3% from 6.8% earlier.

 CPI Inflation has been coming lower than the Market as well as RBI’s estimates throughout the year and is now estimated to reach the lower bound of target range for this fiscal. Current downward revision is attributable to higher Kharif production, healthy Rabi sowing, adequate reservoir levels creating favorable prospects for food prices. GDP growth outlook, on the other hand, has been further revised higher on account of agricultural prospects, continued impact of GST rationalization, benign Inflation and congenial monetary and financial conditions.

 With inflation outlook firmly under control and Fiscal consolidation continuing, we believe Monetary policy will continue to remain in Growth supportive mode over foreseeable future. In this regard, RBI announced immediate measures to improve Liquidity conditions while also supporting liquidity on an ongoing basis. This includes USD 5 BN Buy/Sell Swap for 3 years and Rs.1,00,000 crore of OMOs in December month itself. We expect such measures will continue in the seasonally busy last quarter of the year.

 We feel Growth supportive Monetary Policy, to have favorable ground for short-term as well as long-term yields. RBI assured keeping banking system liquidity in sufficiently positive zone. Further Liquidity operations will be conducted in a way that will keep overnight rate closer to the policy rate. We expect 10-yr G-sec to trade in 6.30% – 6.50% range and drift lower as OMO measure unfolds. Short-term yields are likely to come down on account of a rate cut; however, advance tax outflows should keep 1-year CDs in 6.40%-6.50% range.