RBI MPC finds no need for immediate monetary support as comfortable with growth-inflation trajectory, hints at pause in coming meetings

Unmesh Kulkarni of Julius Baer India shares RBI policy analysis

• RBI committed to proactive management of liquidity in LAF window and the banking system
• RBI expecting growth to sustain and pick up going forward
• Central bank slightly raised its inflation forecasts

Did our AI summary help?

There were no surprises in the RBI policy, with the RBI maintaining status quo on both the policy rates as well as the ‘neutral’ stance. The policy was very much in line with the majority of market expectations.

The RBI has drawn comfort from the current state of the economy, with growth being resilient and inflation staying low and within RBI’s tolerance zone.

On the growth front, RBI finds the economic activity to be resilient and GDP growth to be on a steadily improving trajectory. Agricultural activity is expected to be healthy and well-supported, corporate sector performance is improving and manufacturing activity is picking up.

Construction sector is firm, services sector continues to be strong and business activity is seeing an improvement. Growth in private consumption is expected to sustain, while rural demand is steady and urban demand expected to improve on the back of fiscal (GST rationalization) and monetary support (lower interest rates). The RBI has projected FY26 GDP growth at 7.4% YoY and raised Q1 and Q2FY27 YoY projections by 20 bps to 6.9% and 7.0% respectively.

On the inflation front, RBI is very comfortable with the evolving trajectory, despite a slight uptick in inflation. Food inflation remains benign, supported by adequate foodstock, reservoir levels and healthy crop. Core inflation, barring precious metals, remains contained. Global geopolitical situation, changing weather conditions and the evolving tariff-trade landscape however are viewed as risks to inflation. The RBI has raised its CPI (YoY) projections marginally for FY26 to 2.1% (from 2.0%) and by 10-20 bps for Q1 and Q2 FY27 to 4.0% and 4.2% respectively.

A point to note is that the RBI will be shortly revising the GDP and CPI expectations with the release of the new series for both parameters.

On the liquidity front, RBI has been so far very supportive and has ensured adequate surplus liquidity over the past couple of months. The Governor emphasized that the RBI would remain proactive in liquidity management and ensure sufficient liquidity in the banking system and support monetary policy transmission.

Looking ahead

The low CPI prints might optically suggest that there is still some room for monetary easing; however, RBI is expecting growth to sustain and pick up going forward (with the trade deals also reducing the incremental risks to growth), and it has also slightly raised its inflation forecasts. This suggests that the MPC is quite satisfied with the current growth-inflation trajectory and does not consider it necessary to provide any further ‘immediate’ monetary support.

Having reduced policy rates already by 125 bps, the RBI’s focus incrementally is more on ensuring sufficient liquidity in the Banking system and transmission of the rate cuts. On the rate front, therefore, a pause over the next couple of RBI policies is a likely outcome.

RBI is committed to proactive management of liquidity in the LAF window and the banking system, so as to keep short term yields rangebound. What is to be seen however is whether RBI resorts to Variable Rate Reverse Repo (VRRR) auctions to suck out excess liquidity, which could cause intermittent fluctuation in yields.

Long term (g-sec) yields have been hardening, primarily due to rising global yields but also recently on account of higher gross borrowing announcement by the Government in the recent Union Budget.

While RBI has been supportive of late (through OMOs and forex swaps) to increase durable liquidity, there will be continued pressure on long term yields in the new financial year, with a continuous supply of g-secs (central government borrowing) and SDLs (state government borrowing). Further OMO support from the RBI might be therefore required to keep long term yields in check.