Monetary Policy and Economic Outlook
The Reserve Bank of India (RBI) decided to keep policy interest rates unchanged in February 2025, following a cumulative rate cut of 125 basis points earlier in the year. The decision is backed by India's improving growth prospects and benign inflation conditions.
Growth and Trade Outlook
- India's GDP growth for FY26 is estimated at 7.4%, buoyed by a positive macroeconomic environment.
- The India-US trade deal has improved growth projections, despite earlier challenges with US tariffs impacting sectors like gems, jewellery, and textiles.
- The non-petroleum goods export growth moderated to 3.5% during September-November 2025, down from 7.3% in April to August 2025.
- Lower tariffs are expected to boost GDP growth in FY27 by 0.2 percentage points, projecting a growth rate of 7.2%.
Inflation and Liquidity Conditions
- Inflation is estimated at 3.2% for the fourth quarter of FY26, with core inflation at 2.6% (excluding gold prices).
- Assuming normal weather conditions, inflation is expected to remain comfortable at 4% in FY27.
- Liquidity in the banking system has decreased to Rs 0.7 trillion from an average of Rs 2 trillion earlier in the fiscal year, partly due to RBI's forex interventions.
Bond Market and Government Borrowing
- Despite policy rate cuts, G-sec yields have risen by 45 basis points over eight months, widening the spread between the 10-year bond yield and the repo rate to 150 basis points.
- High borrowing requirements from both central and state governments are putting upward pressure on yields.
- The spread on 10-year state government bonds over Gsecs has increased to 70 basis points from 35 basis points at the start of the fiscal year.
Monetary Policy Outlook
- The RBI is expected to maintain the current policy rates amid improving credit demand.
- The volatile global environment necessitates preserving policy options for future use.
- The focus remains on ensuring ample liquidity and supporting government bond yields.
