Marzban Irani, CIO Fixed Income, LIC Mutual Fund Asset Management
MPC Decisions: The MPC members, in a 5:1 vote, decided to front load the rate cut cycle by announcing a higher-than-expected 50 bps cut in repo rate to 5.5% during its meeting held on 4-6 June 2025. Consequently, SDF rate reduced to 5.25% and MSF rate to 5.75%. The policy stance has been changed to ‘Neutral’ from ‘Accommodative’.
In addition to the above, the RBI announced a significant 100 bps CRR cut to 3% (levels last seen during COVID era) to infuse durable systemic liquidity.
The rationale to cut benchmark rate was to stimulate private consumption, catalyse growth amidst uncertain macro-economic developments, faster than expected easing of headline inflation led by softening food inflation and benign core inflation. The MPC has reiterated that monetary policy will continue to ensure price stability while focus on propelling growth as inflation worries abate.
Growth & Inflation: Projected real GDP growth rate for FY26 has been reaffirmed at 6.5%. Domestic economy continues to be stable as agricultural activities continue to recover, providing resilience to rural demand; urban demand is expected to improve as private consumption and investment activities see revival. However, trade wars and potential supply chain disruptions pose downside risks to overall growth.
The RBI again reduced the projected CPI inflation for FY26 by 30 bps to 3.7% (40 bps reduced during April MPC) owing to improved outlook for food inflation. Food inflation is expected to ease on the back of Kharif harvest and good prospects of Rabi season. Initial estimates by IMD peg India to witness ‘above normal’ monsoons. However, any adverse weather events and uncertainties in global trade may pose an upside risk to inflation.
Liquidity: The durable measures adopted by the RBI since Jan-25 to address systemic liquidity concerns led to significant infusion of durable liquidity aggregating to Rs. 9.5 lakh crore till now. The 100-bp CRR cut announced by RBI in four equal tranches commencing from September 6 to November 29 is expected to release systemic liquidity aggregating to Rs. 2.5 lakh crore by December 2025. The CRR cut will further infuse durable liquidity and lower the cost of funding for banks.
Outlook
The MPC surprised the markets by announcing higher than expected 50bp rate cut, a significant 100bp CRR cut and change in stance to ‘Neutral’. Although, the policy was dovish, we expect that the front loading of rate cut and change in stance, implies that MPC may pause the rate cut cycle in the medium term. The RBI has nudged the banks to ensure faster transmission of rate cuts as lower repo and CRR will lead to lower cost of funding for banks.
As reiterated by the governor, MPC will remain focussed on price stability and any further policy action will remain data dependent. Uncertain trade policies, prolonged geo-political tensions and adverse weather-related uncertainties pose downside risk to macro-economic outlook.
With the rates expected to remain static till December 2025, we expect limited capital appreciation going ahead and shift our focus on accrual-based strategy. Current levels provide a good opportunity to invest in the Liquid, money market, low duration and short-term category schemes. However, investors should choose to invest based on their investment horizon and risk appetite.
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