OPINION Insurance cut delivered, liquidity rush promised, and RBI ready to support further if needed

On one hand, overshoot in growth had reduced the urgency for a rate cut, on the other, strain on liquidity from RBI’s forex intervention to stabilise the rupee had pushed bond yields higher, impeding transmission of earlier rate cuts. Markets were thus closely watching RBI’s communication at this point.

Masterful balancing act
RBI announcements this morning managed to deliver it all. There was a rate cut, there were liquidity infusions, and also a dovish tone for further support if needed. It was a master class in balancing multiple objectives of monetary policy setting. The case for a rate cut was made from high real rates, and the liquidity strategy for the rest of the year was outlined, which should ensure continued transmission of rate cuts and a dovish tone maintained.

The RBI Governor in his statement, noted that a “rare goldilocks” opportunity was provided in H1 FY26 with solid growth and benign inflation and RBI used it to reduce the policy rate by 25bps.

Apart from cutting policy the Repo rate to 5.25% and retaining the neutral stance of the monetary policy, RBI revised its growth projection for FY26 upwards by 50 bps to 7.3%. Growth estimates for both Q3 and Q4 were revised higher to 7% (+60 bps) and 6.5% (+30 bps) respectively. For Q1 FY27 as well, growth is now projected higher at 6.7% (+30 bps).

Inflation projection for FY26, on the other hand, was revised lower to 2.0% from 2.6% estimated in Oct’25. The inflation projections for Q3 and Q4 FY26 have been revised lower by more than 100 bps to 0.3% (1.8% earlier) and 2.9% (4.0% earlier). Headline inflation is now expected to remain below or at the 4% level until H2 FY27.

Best part of the announcements are on liquidity
The most appealing part of MPC announcements is the continuity of affirmative actions outside the policy space. Liquidity measures were the key directions that markets needed, and RBI provided plenty. While systemic liquidity has remained in surplus in November following a volatile October, the core liquidity surplus has narrowed due to currency demand and FX intervention to support the rupee.

Despite CRR cuts announced earlier and RBI’s bond purchase in the secondary market through open-market operations, the spread between the overnight repo rate and the 10-year G-Sec yield widened from 40–50 bps to 100-110 bps. This in turn would have disrupted monetary policy transmission, just when credit growth is showing signs of a revival and demand for durable liquidity is expected to be seasonally higher.

The Governor announced that the RBI will conduct an OMO purchase auction of Rs. 1 lakh crore in two equal tranches and a USD/INR buy sell swap auction of US$ 5bn in December 2025 to inject durable liquidity into the system. This is based on the RBI’s assessment of the current liquidity situation as well as the future outlook. RBI’s move to inject durable liquidity largely pre-empts stress on liquidity due to factors such as currency demand, forex operations, and reserve maintenance in the coming days.

The RBI Governor also stressed the fact that while OMOs and USD/INR buy-sell swap auctions are aimed at maintaining durable liquidity in the system, these are likely to be supplemented by RBI’s regular VRR/VRRR auctions, which are aimed at smoothening transient liquidity requirements so as to ensure that the WACR (weighted average call rate) remains closely aligned to the repo rate.

This builds an expectation of more OMOs into the year. As for the depreciation of the rupee against the greenback, RBI was quite emphatic that it is not particularly worried about the higher Current Account Deficit in the current year. Rather, the belief seemed to be that external capital flows chase growth, and policy support to push nominal growth will solve any issue on external front as well.

The key takeaway thus was continued support from monetary policy ahead while RBI remains focussed on transmission channels to support credit growth. Policy rates are likely to remain low for the next few quarters and RBI has left the door open for further rate cut, should the economy need a growth booster. While the RBI sees some risks to the growth outlook from trade-related uncertainties, it remains confident on the inflation trajectory.

Most importantly, the message of co-ordinated policy support across the board, including GST rationalisation, liquidity infusion, and credit push persists, and has lifted India’s near-term growth prospects.

(The author is Chief Economist, L&T Finance).

Views are personal and do not represent the stand of Moneycontrol.