The RBI delivered a three-pronged surprise with a higher than anticipated 50 bps cut in the repo rate, shift in the monetary policy stance back to ‘neutral’, and a 100 bps reduction in CRR.
Download ReportQuantEco Research || RBI Policy - A tale of three surprises
The RBI today delivered a three-pronged surprise with a higher than anticipated 50 bps cut in the repo rate, shift in the monetary policy stance back to ‘neutral’, and a 100 bps reduction in the cash reserve requirement. These announcements came on the back of an unchanged FY26 GDP growth forecast of 6.5% and a 30 bps downward revision to the FY26 CPI inflation forecast to 3.7%. The aggressive monetary and liquidity easing announcements should be perceived as front-loading of policy accommodation. Under the current macroeconomic environment along with near term extrapolations, the central bank would henceforth remain watchful of upside and downside risks, while maintaining a neutral posture. Barring unanticipated external shocks, we believe the MPC is now likely to get into a prolonged pause with repo rate maintained at 5.50% through FY26. For bonds, the impact of today’s policy announcements is likely to be neutral with shift in stance balancing the aggressive rate cut, while the CRR cut obviating the need for OMO support. As such, we retain our 10Y g-sec yield call of 6.00% - however, we now believe that it could get realized earlier during Q2-Q3 FY26. Thereafter, the 10Y g-sec yield is likely to see a modest drift upwards towards 6.20% by end FY26 as market participants start positioning for a moderate uptick in inflation in FY27.