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With inflation persistently undershooting, the RBI expectedly found it harder to ignore its core mandate of inflation management and therefore finally delivered a 25bps cut in its December policy, while retaining a neutral stance to preserve policy flexibility. Clear near-term inflation visibility—and the need to shift away from an increasingly misplaced 1-year-ahead CPI anchor—has helped the RBI implement a cut, after marking a fifth revision to FY26 CPI inflation. The RBI’s FY26 inflation forecast is now aligned with ours, at 2.0%, even as the Governor leaned into the ‘Goldilocks’ narrative by upgrading growth to 7.3%. Tactically calibrated and flexible forward guidance has also complemented today’s rate easing, thus signalling RBI’s openness to further easing—on both, rates and liquidity. Importantly, while acknowledging repeated headline undershoots, the Governor also conceded that underlying price pressures are even more subdued, adjusted for the gold effect. All this hints at a terminal repo rate of 5% not being ruled out in this cycle. The announced primary liquidity infusion of ~Rs1.5trn (Rs1trn of OMOs and a USD5bn buy–sell swap) is constructive as well. We believe that additional durable liquidity—potentially Rs500–800bn or more—may still be required in 4QFY26, depending on the severity of BoP pressures and the scale of the RBI’s FX operations. Even so, this injection should meaningfully aid transmission, particularly as FX intervention is likely to continue, making the liquidity support especially timely and effective at this stage of the cycle.

MPC delivers with a unanimous vote; flexible communication and mildly dovish bent

The RBI expectedly delivered a unanimous 25bps rate cut to 5.25% while retaining a neutral stance to preserve policy flexibility. One external member (Professor Ram) dissented, preferring an accommodative stance. With inflation persistently undershooting, the RBI could no longer ignore its core inflation mandate and finally moved ahead with a December cut. Clear near-term inflation visibility—and the need to shift away from an increasingly misplaced 1-year-ahead CPI anchor—has helped the RBI bring about the December cut, alongside a fifth downward revision to the FY26 inflation forecast (Refer to ‘RBI MPC Preview: A close call, but December may still deliver’). Importantly, while acknowledging repeated headline undershoots, the Governor recognized that underlying price pressures are even softer once the gold effect is stripped out. This added to the dovish tilt, reinforcing the message of weak demand-side drivers of inflation. This is further strengthened by the RBI’s acknowledgement that beneath the strong growth print in 2Q led by statistical quirks and cyclical forces, the underlying growth levers are still mixed. The RBI’s inflation forecast is now aligned with ours (RBI: 2.0%; Emkay: 1.92%), even as the Governor reckoned the so-called ‘Goldilocks’ narrative as he upgraded growth to 7.3% (Emkay: 7.3%). 2HFY26 inflation forecast has been revised down by ~115bps from the October estimates. Complementing the rate cut, the RBI delivered tactically smart and flexible forward guidance, signalling openness to further easing—on both, rates and liquidity—if warranted. Importantly, it avoided signalling the end of the easing cycle; doing so would have risked undermining monetary transmission (recall the June MPC policy).

Liquidity boost is a welcome step; expect another primary injection in 4QFY26

In line with our expectations, the policymakers announced primary liquidity infusion of ~Rs1.45trn for Dec-25—comprising Rs1trn of OMOs and a USD5bn 3-year buy–sell swap. The RBI reiterated that it will continue monitoring the evolving liquidity conditions and act as needed to keep system liquidity comfortable. We have been arguing that while markets were debating the need and timing of another rate cut, a near Rs2trn liquidity boost in rest of FY26 would be far more efficacious for ensuring a smoother monetary transmission. Although the Governor indicated in the press conference that the planned liquidity infusion could lift system liquidity surplus to above 1% of NDTL, our estimates suggest that even with a modest FX intervention ahead, system liquidity may not cross 0.7% of NDTL by end-Mar-26. (See ‘Liquidity matters…Redux’; Nov-25). This implies that additional durable liquidity—potentially Rs500–800bn or more—may still be required in 4QFY26, depending on the severity of BoP pressures and the scale of the RBI’s FX operations. Overall, the announced liquidity injection should provide a meaningful boost to M0 growth, support transmission, and aid credit expansion—especially given the likelihood of continued FX intervention. The timing and composition of this liquidity support makes it particularly impactful at this stage of the cycle.

Growth-Inflation balance turns comfortable, with acknowledgement of benign underlying inflation pressures

The FY26 growth has been upgraded to 7.3% from 6.8% earlier (Emkay: 7.3%), with 2HFY26 upgraded by 45bps to 6.8% led by growth overshoots in 1HFY26, positive impact of GST rationalization, low inflation, and supportive monetary conditions. 1HFY27 growth is seen at 6.8% (vs the actual 8% for 1HFY26). The MPC acknowledged some emerging signs of weakness in a few leading indicators and downside risks from global uncertainty, but mentioned upside potential if ongoing trade negotiations with the US are speedily (and favorably) concluded. On the inflation front, FY26 forecasts were lowered for the fifth time to 2% (2.6% earlier; Emkay: 1.9%). We note that the current forecast is lower by ~220bps from the first forecast for FY26 made in Feb-25, underscoring how unreliable forecasts have become in this cycle. The revision is largely due to far softer food inflation than earlier projections (and also compared to the usual seasonal trends). Notably, the forecast for 1HFY27 was 4% vs earlier fears of >4% inflation, with the Governor also explicitly mentioning that underlying inflation pressures are lower (by ~50bps) if the precious metals price spike is excluded.

Terminal repo rate of 5% not ruled out in this cycle

The triad of rate cuts, liquidity boost, and flexible, mildly dovish forward guidance—underpinned by a subdued inflation outlook and growth normalizing to sub-7% in 1HFY27—creates room for additional easing in this cycle. That said, the policy path ahead will hinge on 1) how durable growth proves to be after the festive and GST-driven bump, 2) how strong is the inflation rebound viewed in 2HFY27 by the RBI, 3) how strong are the contours (and timing) of the US-India trade deal, if signed, and 4) how the FX market evolves.

Importantly, we continue to argue that the Rupee softness should not be misconstrued as a constraint on further easing. Instead, it acts as a natural stabilizer for growth, especially as India faces a relative erosion of export competitiveness vis-à-vis EM Asia.

Banks’ margin pressures to prolong; we prefer PSBs and select SMID PVBs

Our banks team, led by Anand, is of the view that while the extant 100bps rate cut was just being subsumed by banks, this additional 25bps repo rate cut (though built into their margin workings) shall exert some margin pressure (slightly in 3Q, given the one-month impact, and more so in 4Q), mainly large and SMID PVBs with a higher share of floating rate portfolio including ICICIB, HDFCB, Axis Bank, Federal Bank, Kotak Mahindra Bank, and so on, while banks—like IDFCB, RBL, AU—with a higher share of fixed rate portfolio should be relatively better off. PSBs too will see a limited margin impact, given their higher share of MCLR portfolio. This and the rate cuts/OMOs should help cool G-Sec yields, thereby limiting treasury losses in 3Q. Thus, our banking team’s long-term preferred picks in the PVB space are HDFCB, Axis Bank, IDFC First Bank, Federal Bank, RBL, and Ujjivan SFB— all are likely to benefit on the growth front as well as manage/improve margins (mainly in FY27). Within PSBs, the team prefers SBI, BOB, PNB, and Canara Bank, given their relatively attractive valuations. SBI Cards and CREDAG are its preferred picks in the NBFC-Card/MFI space.

Falling CoFs to drive up NBFCs’ NIM

Our NBFC team, led by Avinash, believes that the RBI delivered highly desirable and tangible dual benefits for NBFC lenders, by rate easing and primary liquidity infusion. This combination of actions will aid NBFCs in bringing down their cost of borrowings, as the cost of bank borrowing (exiting and new) comes down; the softening of bond yields would bring down the cost of newer bond issuances. Beyond the tangible benefits, the tone of commentary favored pro-growth and hinted at a vote of confidence for lenders. In terms of benefits from the 5-Dec action, lenders with higher share of fixed-rate assets (vehicle loans, personal loans, etc) such as CIFC, MMFS and HDBFS are among the top beneficiaries. From the risk-reward perspective, ABCAP and SHFL remain our preferred picks in the non-bank lending space.

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