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Below the Detailed Note on RBI Monetary Policy by Namrata Mittal, CFA, Chief Economist, SBI Mutual Fund

Brief Summary from Report:

RBI Monetary Policy – 5 December 2025 (and Comparison with October 2025 Policy)

1. Policy Action

* RBI delivered a 25 bps rate cut, taking the repo rate to 5.25%.

* Stance remained neutral, with focus on achieving durable alignment of inflation to target while supporting growth.

* Cumulative rate cuts since Feb 2025 now stand at 125 bps.

2. Key Reasons for the Rate Cut

* Weak nominal GDP (8.7% in Q2 vs strong real growth of 8.2%), affecting revenues and credit conditions.

* Very low inflation: FY26 CPI expected at 2%, creating room for growth-supportive policy.

* RBI’s ability to run separate frameworks for FX management and interest rates.

3. Liquidity Management – The Core Focus

* System liquidity has tightened to ~0.5% of NDTL, below the desired ~1%.

* FX outflows and RBI’s dollar sales have drained liquidity.

* RBI announced:

o    Rs 1 trillion OMOs in December.

o    3-year USD/INR buy-sell swap to inject rupee liquidity.

* Liquidity operations to remain data-dependent, with VRR/VRRR used actively.

4. Rupee Outlook

* Rupee is down 4.3% YTD despite a weaker USD — mainly due to trade tensions and weak FPI flows.

* Forward premiums spiked due to dollar shortages.

* RBI’s FX swap should ease pressure.

* Mild depreciation may persist, but a trade deal or FPI inflows could stabilize INR.

5. Growth and Inflation Outlook

* FY26 GDP forecast raised to 7.3% (from 6.8% earlier) due to resilient domestic demand.

* Inflation benign: FY26 CPI cut to 2%; expected to stay below 4% through H1 FY27.

* A new base year revision for GDP and CPI is coming in FY27, which may alter headline numbers.

* Another rate cut in February is possible, depending on data.

6. Market & Fiscal Context

* Markets reacted positively, but sustainability depends on:

* Demand–supply dynamics,

* Fiscal consolidation,

* Nominal growth (currently weak) impacting tax revenues.

7. Comparison With October 2025 Policy

Growth

* Oct FY26 growth: 6.8% → Dec revised to 7.3%.

* Growth remains robust across industry & services.

Inflation

* Oct FY26 CPI projection: 2.6% → Dec reduced to 2.0%.

* Food inflation soft, core inflation stable.

Liquidity

* Liquidity surplus fell from Rs 2.9 tn (Aug) → near-neutral levels in Oct–Nov.

* Dec policy added stronger liquidity measures (OMO + FX swap).

External Sector

* CAD stable around 1–1.3% of GDP, supported by strong services and remittances.

* FX reserves dipped from USD 700 bn (Sep) → USD 686 bn (Nov) due to RBI FX intervention.

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