RBI Policy: Five signals to watch as the MPC weighs a tricky call

Five Key Takeaways from RBI's Upcoming Monetary Policy

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) is set to meet on Friday, with economists expecting a potential pause in interest rates or a 25-basis-point cut to 5.25%. Here's what to watch out for:

1. Policy Outcome: Pause or Rate Cut?

The primary question is whether soft headline inflation and a slowdown in nominal GDP will give the RBI enough room to extend its easing rate cycle. Economists at Standard Chartered Bank believe that ample liquidity and front-loaded fiscal spending already support activity, making a rate cut unnecessary.

• Pause or Rate Cut? - Economists are divided, with nine expecting a pause and four seeing room for a 25-basis-point cut.
• Soft Headline Inflation - Headline inflation for October dropped to 0.25%, the lowest on record, driven by food deflation, rationalisation of GST, and base effects.
• Nominal GDP Slowdown - Nominal GDP slowed down in Q2, driven by weakening nominal GDP at 8.7%.

2. Will RBI Acknowledge the GDP Surge?

The RBI's projection for FY26 GDP at 6.8% looks conservative after the back-to-back upside surprises. HDFC Bank has upgraded its projection of GDP to 7.3% from 7% earlier as it believes that sequential momentum has genuinely improved.

• GDP Revision - Economists unanimously believe that the central bank will revise its GDP guidance above 7%, but may avoid large upward revisions given weakening nominal GDP.
• Global Headwinds - Looming headwinds from slower global growth, US tariff uncertainty, and moderating government capex in the second half of FY26.

3. Inflation: How Much Comfort is Enough?

Analysts expect RBI to cut its inflation projection to around 1.8-2% for FY26 from its previous forecast of 2.6% and for Q1FY27 to 4% from 4.5%.

• Headline Inflation - Headline inflation for October dropped to 0.25%, the lowest on record, driven by food deflation, rationalisation of GST, and base effects.
• CPI Excluding Gold - SBI Research said CPI, excluding gold, is already negative and Q1FY27 inflation is trending below 3%.

4. Liquidity and Market Measures

The market will watch for further steps to cool yields, with SBI Research expecting "calibrated easing within a neutral stance" potentially through open market operation purchases to maintain durable liquidity at 2.0–2.5% of NDTL (net demand and time liabilities).

• Liquidity Management - RBI will need to balance forex intervention with banking system liquidity management.
• Government Bond Yield Curve - Steep government bond yield curve is a concern, with uneven transmission of rate cuts.

5. Protection for the Rupee

Market participants expect Governor Sanjay Malhotra to reassure that RBI will act against disorderly volatility in the rupee even as it balances forex intervention with banking system liquidity management.

• Rupee Volatility - The rupee's recent fall past 90 against the US dollar has come from weak capital inflows, a wider trade deficit, and limited RBI intervention.
• US-India Trade Deal - The limbo of the US-India trade deal is a concern, with market participants expecting RBI to act against disorderly volatility in the rupee.