The Monetary Policy Committee (MPC) of the Reserve Bank of India could consider reducing the policy rates if the upcoming GDP data is lower than expected and the American Federal Reserve starts with a weaker interest rate reduction as a result of a weaker labor market, according to a report by HSBC Mutual Fundd.
For FY26, in its last policy meeting, the RBI-MPC kept the growth projection of GDP at 6.5 percent. The quarterly GDP growth is projected at 6.5 percent in Q1, 6.7 percent in Q2, 6.6 percent in Q3 and 6.3 percent in Q4. The central bank had also decided to leave the REP rate unchanged at 5.50 percent and maintained its neutral attitude. After cutbacks, the decision comes on the front of 100 basic points in earlier policy.
The MPC emphasized that it opted for a break with a view to recent tariff reductions, while it also acknowledges that global uncertainties and rates are risks for growth. However, it trivialized the likely impact of these risks on inflation. The report stated: “Every possible space for further relaxation can open if GDP prints are lower than expectations”.
In his prospect, the report stated that the MPC will probably remain data dependent. Any further space for relaxation can open when economic growth based the expectations and when the American Fed starts to lower aggressive tariff reductions to tackle weaker labor market conditions. Until such triggers appear, the rates of the government effects (G-SEC) are expected to be bound.
The report said that it is of the opinion that liquidity will remain the most important motivation of proceeds. The RBI is expected to continue to offer sufficient liquidity in the banking system to ensure that the benefits of previous rate reductions are sent in full. Currently, corporate bonds in the 2-4-year segment offer favorable spreads of 65-75 basic points on Indian government bonds (IGBs), and these will probably benefit from the spread compression. Now that the relaxation of the end of his end is, the focus is probably on corporate bonds to catch the Carry, and the report indicated an overweight position on 2-4 years of corporate bonds.
Looking ahead, the report stated that RBI-MPC is expected to follow a calibrated approach at the end of the calendar year 2025, in particular because inflation is expected to remain benign until the fourth quarter of FY26. The liquidity conditions are also expected to remain comfortable, with cuts on the cash reserve (CRR) set to get into force in a month, which helps previous policy improvement by lower loan interest rate.
The report added that a potential rate that is reduced by the American Fed from September can give the RBI more room to act. Because inflation remains benign, the growth test of India remains the most important focus on the upcoming policy meetings. During the press conference, the RBI governor has repeated that policy decisions will be made on the basis of meetings and remain dependent on incoming data.
Published on August 14, 2025
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