From Easing to Acceleration: Growth Now Takes Centre Stage

TL: DR

• The RBI delivered a 50-bps repo rate cut, bringing it down to 5.50% — the third consecutive cut, totalling 100 bps since February 2025.
• The policy stance shifted from accommodative to neutral, signaling a likely pause in the near term. Further moves will be data-dependent, guided by inflation, monsoon progression, and global risks.
• A staggered 100 bps CRR cut was announced (Sept–Dec 2025), expected to inject ₹2.5 lakh crore of durable liquidity into the banking system.
• FY26 CPI inflation forecast was revised down to 3.7% (vs. 4.0% earlier), with Q1 seen at 2.9% — a six-year low.
• GDP growth for FY26 retained at 6.5%, supported by resilient consumption, capex push, and robust services.
• Liquidity conditions have turned into a comfortable surplus, aiding transmission across short-term rates.
• Transmission to short-term rates is already visible; however, transmission to lending rates may unfold with a lag, especially at the longer end.
• With three consecutive cuts and a shift in stance, the RBI has likely completed its pivot — the bar for further action is now higher.
• Investment strategy: With much of the easing already priced in, duration strategies may deliver only moderate gains from here and could see some profit booking. A barbell approach is prudent — blending select long-duration exposure with 2–3-year high-quality accrual strategies (short-duration, banking & PSU) to balance income and reinvestment risks in a liquidity-rich environment.

Inflation outlook: Comfortably Below Target, But Vigilance Remains Key

Inflation has continued its downward trajectory, with headline CPI inflation falling to a six-year low of 3.2% in April 2025, driven primarily by a sustained moderation in food prices and contained core inflation. This marks the sixth consecutive monthly decline in food inflation, aided by favourable rabi output, improved supply chains, and a supportive base.

The RBI has revised its FY26 CPI inflation forecast down to 3.7% (from 4.0% in April), with Q1 now projected at just 2.9%, reflecting both statistical and structural comfort. Other quarterly estimates stand at 3.4% for Q2, 3.9% for Q3, and 4.4% for Q4. The fuel inflation component, which had exited deflation, remains modest, while core inflation has remained steady despite rising gold prices.

Looking ahead, the early and above-normal monsoon is expected to further anchor food prices through improved kharif sowing. In parallel, inflation expectations among rural households have eased, while commodity prices, including crude oil, have stayed benign amid a softer global growth outlook.

(Source: RBI, Fisdom Research)

However, the RBI has highlighted that risks remain evenly balanced. Upside risks may emerge from:

• Weather-related disruptions, including potential volatility in monsoon distribution.
• Tariff-related tensions and their impact on global commodity pricing.
• Sticky components of core inflation, such as precious metals.

Our View: Inflation is no longer the binding constraint for policy action. With CPI expected to stay below the 4% target for most of FY26, the RBI has rightly frontloaded its easing cycle. However, any future rate action will hinge on the inflation path sustaining below 4%, particularly in the second half of the year.

Growth: Domestic Momentum Intact, Investment Rebound Visible

India’s GDP growth for Q4 FY25 surprised positively at 7.4%, up sharply from 6.4% in the previous quarter, led by strong performance in private consumption (6.0%) and gross fixed capital formation (9.4%). For the full year FY25, real GDP growth came in at 6.5%, in line with RBI projections.

The momentum appears intact in FY26 as well. The RBI has retained its real GDP growth forecast at 6.5%, with quarterly estimates as follows:

(Source: RBI, Fisdom Research)