Monetary Policy Committee (MPC) Decision

The recent repo rate decision by the MPC in December was closely contested, influenced by the re-emergence of monetary easing potential due to low CPI inflation levels.

Liquidity Support Measures

• Significant liquidity support was provided by the central bank, including: 
  1. Open Market Operation (OMO) purchases amounting to Rs 1 trillion.
  2. Three-year $/rupee buy-sell swaps of $5 billion.
  3. Total injection of durable liquidity worth Rs 1.45 trillion in December.

Interest Rates and Yield Guidance

• Concerns over federal and state borrowings, RBI's forex interventions, and global market volatility keep domestic yields sticky.
• RBI's guidance on supporting durable liquidity is expected to help reduce bond yields and soften bank lending rates.

Growth-Inflation Dynamics

India's growth and inflation scenario resembles a "Goldilocks" situation:

• Inflation decreased faster than expected, with CPI inflation forecasts revised down by 220 basis points for 2025-26.
• GDP growth projection for 2025-26 revised upwards to 7.3% year-on-year.
• Strong rural demand and gradual urban recovery are expected to support growth momentum.
• External challenges include global policy uncertainties and geopolitical tensions.

Inflation Expectations and Real Rate

• Inflation is anticipated to average 3% during the second half of 2025-26 and the first half of 2026-27.
• The real rate is projected to remain above the RBI's neutral real rate of 1.4-1.9%, indicating potential continuation of the rate-easing cycle.

Future Policy Considerations

• Clear signalling and careful sequencing of future policy decisions are crucial.
• Proactive liquidity management is necessary to achieve policy objectives and desired rate transmission.