RBI’s challenge: How to up growth forecast, but sound dovish

All eyes on RBI October policy as it juggles lower inflation, higher growth forecasts and the challenge of sounding dovish to calm markets.

The RBI’s challenge in the October 1 policy may be how to sound dovish, when it will be forced to raise its growth forecast for the current year.

Indeed, tomorrow’s policy poses a many-sided challenge: The RBI will have to lower the inflation forecast, which is a dovish indication, but it will have to up the growth forecast, which is basically a hawkish sign

The market’s preference is not so much for a cut, but for a clear indication from the RBI that it is explicitly dovish. For this, the RBI's forecast of lower inflation is not enough. RBI needs to probably say that if growth comes under pressure, it stands ready to act.

Not surprisingly, the polls show a deeply divided market. The near-unanimous view is that RBI has space for one more cut. The disagreement is more about whether RBI will use that space to cut tomorrow or wait to use it in December or February. The CNBCTV18 poll says, no cut tomorrow.

So what all with the market watch out for:

Of course, the market will watch for the rate action. Considering it is going with a majority 'no-cut' bias as seen in the polls, a cut may be a positive surprise, but it will only push up stock markets (minus banks) and short-term bonds. Long bonds may actually fall, and their yields may rise because the cut will be seen as the last in this cycle. Yields move on expectations.

The second point the market will watch out for will be the RBI’s forecasts. In the last policy in August, what spooked the market most was the one-year-ahead inflation forecast. RBI said it sees the Q1FY27 CPI at 4.9 percent. That number washed away all hopes of a rate cut. Now with GST cuts and CPI surprising to the downside, the RBI will bring down both the average CPI for FY26 and the forecast for Q1 FY27. If they do bring down the Q1 number very close to 4 percent the market may see this as dovish. Separately, the FY26 average CPI was estimated by RBI at 3.1 percent. A CNBCTV18 poll showed the average on the street at 2.5 percent. RBI’s new FY26 CPI forecast will also influence the market’s mood.

Strangely, it is the comments around growth that the market will watch closely. RBI will most certainly raise the full-year forecast closer to the CNBCTV18 poll number of 6.7 percent from its current estimate of 6.5 percent, after the Q1 GDP at 7.8 percent came way above RBI and market estimates. The market will want to see how much lower RBI revises its forecast for the 2nd half .

Current forecasts are as follows:

• Q3 FY26 at 6.6 percent
• Q4 FY26  at 6.3 percent
• Q1 FY27 at 6.6 percent

The bond market will want to hear that golden phrase, 'OMO' or open market operations, to buy bonds. This is done by the RBI to provide liquidity. But now with a CRR cut underway, liquidity will gush in. So the chance of RBI saying it will buy bonds looks remote.

Ultimately market will watch the RBI governor’s language. They will search and parse his phrases for signs of impending dovishness. It’s tough to guess whether the RBI is in a dovish mood at all, and if yes, how it may be conveyed.

Methinks, tomorrow’s policy will test RBI’s communication skills to the utmost