The RBI has addressed market concerns over possible short-term liquidity drying up | Photo credit: ANUSHREE FADNAVIS
The MPC’s commentary on inflation outcomes was expectedly favorable. CPI inflation forecasts for the third and fourth quarters of FY26 were cut by 110-120 basis points, while those for the first quarter of FY27 were cut by 60 basis points. Projections for the first half of FY27 are anchored around 4 per cent, in line with ICRA estimates, suggesting that while the trajectory is expected to continue upward, outcomes are likely to remain decidedly comfortable, around the midpoint of the RBI’s medium-term target for inflation.
Interestingly, the policy paper also stated that the decline in inflation has become more widespread; About 80 percent of the CPI basket (by weight) recorded inflation rates of less than 4 percent in October 2025, compared to about 63 percent in April 2025. However, this generalization was partly driven by the favorable impact of the GST rate cuts, with more than half of the items in the CPI basket witnessing a sequential price decline in October.
GDP growth projections
While the MPC acknowledged the stronger-than-expected growth performance in the second quarter of FY26, it chose to focus on the expected near-term weakening to cut rates. While it has raised its GDP growth forecasts for the third and fourth quarters of FY26, and the first quarter of FY27, by 30 to 60 basis points, the growth rate is expected to decline from the 8 percent observed in the first half of FY26.
The MPC’s GDP growth forecast for FY26 now stands at 7.3 percent, slightly lower than the ICRA estimate of 7.4 percent. Thereafter, the company expects growth to remain robust at 6.7-6.8 percent in the first half of FY27. The Committee also highlighted two-way risks from external uncertainties, with a potential benefit from a trade deal with the US.
Overall, revisions to the MPC’s inflation and growth forecasts were largely in line with expectations. We therefore do not expect further interest rate cuts unless unexpected developments lead to material changes, especially on the negative side of growth forecasts.
On the liquidity front, the RBI has addressed market concerns about the potential drying up of liquidity in the short term as the tax front date approaches. It will conduct OMO purchases worth ₹1 trillion and USD/INR Buy/Sell Swap auctions of $5 billion, leading to a sustainable liquidity infusion of approximately ₹450 billion. Overall, sustainable liquidity is estimated to increase by ₹1.5 trillion over the next month. This is expected to ease pressure due to input tax and GST outflows as well as further increase in currency leakage due to higher demand during wedding season and agricultural crop procurement in the fourth quarter of a financial year. These measures follow the 100 basis point CRR cuts, which had pumped in liquidity of around ₹2.4 trillion in the September-November 2025 period.
The reduction in policy repo rate by 100 basis points during February-June 2025 has reduced the weighted average lending rate (WALR) of banks’ outstanding rupee loans by 63 basis points. On the deposit side, the weighted average domestic term deposit rate (WADTDR) on outstanding deposits has fallen by 32 basis points over the same period. The 25 basis point rate cut, combined with liquidity injection measures, would boost policy transmission, putting further downward pressure on loan and deposit rates. However, 10-year bond yields appear largely stable despite the measures announced by the RBI.
While the dollar/rupee pair has crossed the 90 mark in recent sessions, we broadly agree with the RBI Governor’s assessment that the current account deficit has been pushed to modest levels in FY26 despite some stress in the current quarter.
The writer is Chief Economist, Chief Research and Outreach, ICRA
Published on December 6, 2025
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