Monetary Policy Committee (MPC) Decision
The recent repo rate decision by the MPC in December was closely contested, influenced by the re-emergence of monetary easing potential due to low CPI inflation levels.
Liquidity Support Measures
- Significant liquidity support was provided by the central bank, including:
- Open Market Operation (OMO) purchases amounting to Rs 1 trillion.
- Three-year $/rupee buy-sell swaps of $5 billion.
- Total injection of durable liquidity worth Rs 1.45 trillion in December.
Interest Rates and Yield Guidance
- Concerns over federal and state borrowings, RBI's forex interventions, and global market volatility keep domestic yields sticky.
- RBI's guidance on supporting durable liquidity is expected to help reduce bond yields and soften bank lending rates.
Growth-Inflation Dynamics
India's growth and inflation scenario resembles a "Goldilocks" situation:
- Inflation decreased faster than expected, with CPI inflation forecasts revised down by 220 basis points for 2025-26.
- GDP growth projection for 2025-26 revised upwards to 7.3% year-on-year.
- Strong rural demand and gradual urban recovery are expected to support growth momentum.
- External challenges include global policy uncertainties and geopolitical tensions.
Inflation Expectations and Real Rate
- Inflation is anticipated to average 3% during the second half of 2025-26 and the first half of 2026-27.
- The real rate is projected to remain above the RBI's neutral real rate of 1.4-1.9%, indicating potential continuation of the rate-easing cycle.
Future Policy Considerations
- Clear signalling and careful sequencing of future policy decisions are crucial.
- Proactive liquidity management is necessary to achieve policy objectives and desired rate transmission.
