Moneycontrol Pro Weekender | RBI unleashes Goldilocks

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Dear Reader,

RBI Governor Sanjay Malhotra provided a succinct explanation for the rate cut when he said, “Inflation at a benign 2.2 per cent and growth at 8.0 per cent in H1:2025-26 present a rare Goldilocks period.” That Goldilocks period is likely to get even better in the second half of the fiscal year, with the Monetary Policy Committee (MPC) pegging average retail inflation at 1.75 percent, although growth is expected to slow to a more modest but still strong 6.75 percent in H2.

At its October policy meeting, average growth in the second half of FY26 was projected at 6.3 percent and average inflation at 2.9 percent. That means the forecast for GDP growth has been revised upwards. Why then cut rates? Well, simply because the inflation forecast too has come down, so why not seize the opportunity? As my colleague PCBL, “The policy space created by the collapse in inflation allows the central bank to support this momentum without losing credibility.”

What’s more, retail inflation for Q1 FY27 is now forecast to be 3.9 percent, compared with 4.5 percent in the October monetary policy statement. That’s a projected fall of 60 basis points while the policy rate has been cut by just 25 basis points, which means the real policy rate is still higher than what it was based on the earlier forecasts. That opens the door to further rate cuts. As Gaurav Kapur, chief economist at IndusInd Bank, wrote: “Based on these baseline projections, especially on inflation, there is still space for another repo rate cut of 25 bps under the neutral stance. If headline inflation continues to surprise on the downside vis-vis the baseline trajectory, the MPC may undertake more easing in its next meeting in February.”

RBI Governor Malhotra has also signalled that he will ensure adequate liquidity and more, to ensure that the rate cuts are passed on to borrowers.

How has the Indian economy managed its Goldilocks status despite turmoil in international trade and a global slowdown? Well, global weakness may actually be a boon for India because it keeps commodity prices down. Brent crude oil prices, for instance, are now around $63 per barrel, which is great for oil importers. It’s a big reason why the RBI governor is unconcerned about the current account deficit. Low commodity prices are the reason why, in spite of the total flow of resources to the commercial sector so far in this financial year going up by 21.8 percent compared to the same period last year, core inflation has been remarkably well behaved.

The other reason, of course, is that India’s economy if largely dependent on domestic demand, which makes it resilient to external headwinds. While exports in some sectors have been hit, Governor Malhotra said, “Healthy services exports coupled with strong remittance receipts are expected to keep CAD modest during 2025-26.” That said, he also pointed out: “External uncertainties continue to pose downside risks to the outlook, while speedy conclusion of various ongoing trade and investment negotiations present upside potential.”

Attention now shifts to the prospects of a US rate cut, with the Federal Open Market Committee meeting on December 9 and 10. The CM FedWatch tool at the time of writing this newsletter shows that the probability of a 25 basis point rate cut at this meeting is 87 percent. This FT story, free to read for Moneycontrol Pro subscribers, also says it’s likely the Fed will cut interest rates next week, although it argues that “there’s a black hole where central banks’ theory of inflation seems to be”.

The US markets have recovered from the jitters about whether AI stocks are in a bubble, thanks to renewed faith that the Fed put will bail them out. There’s an underlying belief among market participants that the authorities, be it the Trump government or the Fed, can’t stomach a market crash — This is the reason for buying every dip. But there is a contrary view, and from very eminent quarters — Nobel Laureate economist Paul Krugman argues in his substack post titled 'Warning: The Fed Can’t Rescue AI’ that during the dotcom bust, “while these rate cuts did create brief bouts of, well, irrational exuberance, they did nothing to prevent the tech bubble from eventually deflating”. Do read the whole piece here.

Nevertheless, a Fed rate cut will be welcome for India, as it could take some pressure off the beleaguered rupee. We pointed out that all yardsticks show that on a Real Effective Exchange Rate (REER) basis, the rupee is undervalued, which suggests that a rebound could swiftly happen once trade tensions with the US ease. As Miss Prism told Cecily in Oscar Wilde’s ‘The Importance of Being Earnest’, “The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side.”

The Indian equity market has underperformed massively — year to December 4, MSCI India was up a mere 3.6 percent in dollar terms, compared to 26.3 percent for MSCI EM. And this is in spite of India's rare combination of low inflation and strong growth giving it a policy luxury that most economies can only envy. The RBI and the MPC have now done their bit. So has the government, by its tax cuts.

The fundamentals suggest Goldilocks should scare the bears away. But with Indian equities trailing emerging markets hugely, clearly the bears aren't convinced yet. It’s time for Goldilocks to roar.

Cheers,

Manas Chakravarty

In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:

Stocks

Indigo, Weekly Tactical Pick: Why this IT bellwether captures our attention, Mphasis, PG Electroplast, Coforge, Krsnaa Diagnostics, EIL, Aequs IPO, Meesho IPO, PCBL, International Gemmological Institute India, IndusInd Bank, Persistent Systems, Does this auto ancillary stock merit a place in your portfolio? Dodla Dairy, Cement sector review

Financial Times

Martin Wolf: It’s time to sound the alarm on growing fiscal, financial risk

How executive pay went galactic

Ruchir Sharma: The best time to buy quality stocks is now

The essence of economics

Markets

MSCI EM slumps in November, marking its biggest decline in 12 months

Should bullion form part of your investment portfolio in 2026?

Worried about a coming Correction? Here's a guide on how to ride it out

Capex gets just 17% share of IPO funds as promoters cash out through OFS

Govt shuts door on FDI limit hike, merger chatter; PSU bank rally now shifts to fundamentals

HDFC Bank, ICICI Bank may face short-term selling as Bank Nifty, FinNifty shift towards diversification

Taking stock – Growth up, prices down, RBI policy on edge

Companies & Sectors

What a revised tax regime for ITC could mean for investors

Why Cognizant’s rebound should worry Indian IT

Inox Wind

Rupee depreciation to bring relief for Indian IT

Domestic tourism is spicing up India's hotel sector across segments

Is domestic solar manufacturing heading for a shake-out?

EPC firms’ working capital cycle deteriorates, margins slip

From distress to mainstream: The rise of gold loans in India

Banking stocks

Pen Urban Bank fraud: A wake-up call for India’s cooperative banking system

Economy & Policy

India's structural transformation is raising potential growth — but only for some

Atomic Bill — What is needed to give it a real power boost?

Can India emerge as a counterweight to China in rare earth landscape?

RBI can explain a liquidity measure easier than a rate cut this time

Tech & Startups

Nvidia: Uneasy lies the head that wears the crown

Startup Street: For Indian VCs, AI is not the only game in town

Others

Japan bond crisis—calm before the storm

Trump’s intensified immigration policy may face judicial, economic hurdles

GuruSpeak

The rote response to soaring tomato prices underlines the urgent need to reform India’s horticulture markets