Pause on rate is a telltale for future rate cuts by the RBI

RBI has maintained status quo on key policy rates in the just concluded policy review by MPC. However, there is every possibility that the apex bank may go for rate cuts by upto 50 basis points in the current credit cycle.

The unanimous decision of MPC to vote for a status quo, keeping the policy rate unchanged, signals a rare kind of dynamism that fans out to areas well beyond the monetary policy, facilitated by comfortable liquidity conditions and benign external sectors despite trade led uncertainties. Domestic financial system appears to benefit the most through a slew of forward-looking reforms that aim at global repositioning of an already resilient ecosystem. The MPC has also decided to retain the stance at neutral.

Taking into consideration the factors like healthy progress of the monsoon, higher Kharif sowing, adequate reservoir levels, comfortable buffer stock of foodgrains and most notably GST rate rationalization, RBI has revised downwards its FY26 CPI inflation projection by 50 bps to 2.6 per cent. At the same time, the regulator also revised upwards its projection for real GDP growth for FY26 to 6.8 per cent. FY27 inflation numbers are projected at 4.5 per cent.

Juxtaposed against the uncertainty plaguing the global financial markets, and economies themselves, as per Ecowrap, the choice of MPC of holding rates seems logical from a regulatory angle per se. However, given monetary policy communication plays a pivotal role in guiding expectations, the perceived reaction function, and the clarity with which communication is delivered assumes utmost importance. In this context, the RBI has kept the door ajar for future rate cuts with seemingly low inflation forecasts and downward adjustments in growth though the timing of such could keep everyone guessing.

The unchanged Repo rate bodes well for banks’ NIM outlook. However, with the inflation trending lower and the MPC hinting at policy space for supporting growth, IIFL expects further 50bps of cut in this cycle.

With reforms facilitating resilience and improved financial across Indian Banks with anti-fragile balance sheets, it is, but natural for them to look beyond the generic banking themes and expand the economy of scope by offering services in lucrative areas that have hitherto been exclusively a playfield for foreign banks / large NBFCs as also PE/VC firms and regulatory green lighting of acquisition financing promises to unlock value in corporate funding life cycle. M&A deals in FY24 were valued at over $120 billion. Assuming debt component of 40 per cent of M&A and 30 per centof this could be financed by banks, this translates into a potential credit growth of Rs1.2 lakh crore.

The probability of a 25 basis points residual cut in December MPC has increased, believes SBM.

There was a recognition that overall inflation outlook has turned even more benign, as per Emkay since the last MPC meeting, with a further 50bps downward revision to FY26 inflation.