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Below the Quote on RBI policy announcement from Dhananjay Sinha, CEO & Co-Head – Institutional Equities at Systematix Group

The RBI’s monetary policy announcement was largely on expected lines. Key highlights include a 25bp repo rate cut to 5.25%, announcement of Rs.1 trillion OMO purchases of G-Secs, and a $5 billion buy sell USD swap. These measures reinforce the central bank’s accommodative stance and align with its assessment that the Indian economy is in a rare, sweet spot of robust growth and benign inflation, creating room for further easing.

Cumulatively, in the current cycle, the RBI has cut policy rates by 125bp, reduced CRR by 125bp, and now injected durable liquidity through these operations.

In our view, underlying demand remains significantly weaker than suggested by headline GDP growth. Accordingly, monetary easing has been complemented by fiscal measures, notably income tax relief and GST rationalization, as well as regulatory easing in the previous policy to revive credit offtake. Taken together, both the government and the RBI are pursuing a coordinated counter-cyclical reflationary macro policy.

The central bank’s interventions in the G-Sec market (via OMO purchases) and the dollar swap program also serve multiple objectives: ensuring financial market stability amid relentless FPI selling in Indian equities, guiding the yield curve toward lower risk-free rates (which supports equity valuations and prevents capital flight), and keeping government borrowing costs low at a time when declining tax revenues are threatening the 4.4% fiscal deficit target. Overall, the projected growth-inflation mix along with the latest measures can be described as dovish with a greater focus on ensuring adequate surplus liquidity. 

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