The RBI's pivot has become more structural in its April policy, with the MPC (Monetary Policy Committee) delivering a back-to-back 25 bps rate cut while at the same time changing the policy stance from ‘neutral’ to ‘accommodative’.
What really stood out in the Governor’s speech is the confidence that he has exuded on behalf of the MPC, with respect to the evolving growth-inflation dynamics.
Inflation, the cornerstone of monetary policy for the last couple of years, is no longer a concern, at least in the current financial year. The MPC is fairly confident that food inflation will now be under control, and there is a decisive improvement in its inflation outlook and also greater confidence of durable alignment of headline CPI with the MPC’s 4% target. While the MPC does acknowledge potential risks from the tariff-led evolving global situation, it sees a sharp decline in domestic inflation expectations. The recent fall in commodity and crude oil prices also augurs well for the inflation outlook.
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Consequently, the RBI has revised down its FY26 forecast for the CPI from 4.2% to 4.0%, with the first 3 quarters ranging between 3.6-3.9%.
On the growth front, the domestic economy is still on a recovery path after a weak performance in 1HFY25. The Indian economy is relatively on a much better standing, with good agricultural prospects, strong rural demand and improving urban demand, manufacturing revival, resilient services growth, healthy financial sector and improving government spending. However, the MPC believes that the global uncertainties led by the Trump tariffs can create significant uncertainties around growth, which can potentially dampen investment decisions by businesses and households, and the trade restrictions can impact growth, with exports clearly bearing the brunt.
The RBI has, therefore, brought down its GDP growth forecast for FY26 from 6.7% to 6.5%, with 20-30 bps reduction in growth estimates in the immediate quarters (Q1 and Q2FY26).
Shift in Policy Stance and Liquidity Management
There has been a clear ‘sequential’ shift, or improvement, in the RBI’s liquidity management and policy stance. It has earlier cut the CRR, changed the policy stance in October 2024 policy from the long-standing ‘withdrawal of accommodation’ to ‘neutral’, followed up with a number of liquidity injection measures (including OMOs and swap), and now officially enhanced the policy stance further to ‘accommodative”.
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It is notable is that the RBI Governor has sought to provide comfort to the market by clarifying that while an accommodative stance should not be associated directly with liquidity management, it would imply additional rate cut or status quo in the subsequent MPC meetings. Governor Malhotra also reiterated RBI’s commitment to ensuring adequate liquidity in the system, through the use of its liquidity management tools.
The Monetary Outlook
The rate pivot by the MPC is now more structural in nature, which makes the policy outlook more dovish than earlier. With inflation no longer a near-term concern for the RBI and with MPC’s focus being on supporting growth, given the global uncertainties, stage is set for additional monetary easing by the RBI MPC.
We expect the MPC to cut the repo rate by an additional 50 bps in FY26, taking the repo rate to 5.5% sometime during the year. The RBI has front-loaded the current rate cycle with 2 back-to-back rate cuts; whether it will deliver a 3rd straight cut in June will depend on the evolving global situation and its impact on the global and domestic growth and demand. Having delivered 50 bps of rate cuts, the RBI will now want to see the transmission of the cuts taking place in the banking system, especially as it has brought the liquidity situation from deficit to surplus.
RBI is likely to remain supportive with its liquidity management, and now with an accommodative policy stance in place, yields have the potential to soften further from here over the medium term. In the near term, however, one needs to be watchful that (a) the markets had already priced in a 25 bps rate cut and change in policy stance and (b) global yields have been extremely volatile, and this may bring about some near-term volatility in domestic yields as well.
The environment continues to be benign for Indian fixed income investors, who are likely to benefit from an eventual decline in (and steepening of) the yield curve.
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