The decision was unanimous. The inflation forecast for FY26 was lowered to 3.10% from 3.70% earlier, while the GDP growth forecast was retained at 6.50% for FY26. The forecast for CPI inflation for Q1FY27 has been given at 4.90%, while for GDP growth it is 6.60%.
The MPC statement laid emphasis on “core inflation,” while mentioning that the lower headline CPI currently being witnessed is mainly due to volatile food prices, especially vegetable prices.
The MPC maintained policy rates and a neutral stance, forecasting lower FY26 inflation at 3.10% but emphasizing core inflation concerns. Despite robust growth projections, the MPC remains data-dependent, hinting at potential future rate cuts. Bond yields rose post-announcement, but corporate bonds remain attractive for investors with medium-term horizons.
More importantly, with the 1-year forward-looking inflation at 4.90% (for Q1FY27) forecasted substantially above the medium-term target of 4%, along with the forecasted growth of 6.60% for Q1FY27, the bar for further rate cuts is higher.
The MPC remains optimistic on growth, as it mentions in its statement: “Domestic growth remains resilient and is broadly evolving along the lines of our assessment. Private consumption, aided by rural demand, and fixed investment, supported by buoyant government capex, continue to boost economic activity.
On the supply side, a steady southwest monsoon is supporting kharif sowing, replenishing reservoir levels, and boosting agricultural activity. Moreover, the services sector and construction activity remain robust.”Further on the growth outlook, the statement mentions that “the above-normal southwest monsoon, lower inflation, rising capacity utilization, and congenial financial conditions continue to support domestic economic activity.The supportive monetary, regulatory, and fiscal policies, including robust government capital expenditure, should also boost demand. The services sector is expected to remain buoyant, with sustained growth in construction and trade in the coming months.”
However, it cautions on the external environment, with the MPC statement mentioning that “prospects of external demand remain uncertain amidst ongoing tariff announcements and trade negotiations. The headwinds emanating from prolonged geopolitical tensions, persisting global uncertainties, and volatility in global financial markets pose risks to the growth outlook.”
The MPC statement concluded by stating that “The MPC resolved to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path.”
Thus, in our view, the MPC has conveyed a message of robust growth along with stable inflation, with some uncertainties pertaining to global growth amidst the current geopolitical environment. The MPC will remain data-dependent and can react to evolving data, and it has not shut the door on a future rate cut.
Market Reaction
The bond markets were expecting a pause along with a dovish tilt, given the current and expected lower inflation, with a minority section of the market expecting a rate cut.
The market perceived the policy statement to be leaning towards hawkishness, and as a result, bond yields went up across the curve. The benchmark 10-year bond yield ended the day at 6.42%, up by 8 bps during the day.
Our View: Yields to Remain Rangebound
We believe that both growth and inflation can surprise on the downside, which could open up space for another 25 bps rate cut in the Oct–Dec quarter.
The critical factor will be the evolution of RBI’s projection of CPI inflation for Q1/Q2 FY27 going forward, and any downward revision can open up space for incremental rate cuts—especially given the current global geopolitical uncertainties and some signs of domestic slowdown.
Bond yields have gone up since the June MPC meeting, and with the current MPC language, further near-term pressure on yields can be expected.
However, we think that the 10-year bond yield at 6.50% or higher presents an attractive tactical opportunity to increase duration, as we believe that growth will surprise on the downside along with inflation.
We think that yields will remain rangebound, with the benchmark 10-year bond yield moving in a range of 6.25% to 6.60% over the next couple of months.
We maintain our view that corporate bonds will outperform over a medium-term horizon, and corporate bond funds with up to 5-year duration present an attractive investment opportunity from a risk/reward perspective. Long duration can be used tactically.
Investors with a 12–18-month investment horizon can look at corporate bond funds, given the attractive spreads amidst abundant liquidity. Investors having an investment horizon of 6–12 months can look at money market funds, as the current 1-year yields offer attractive carry and roll-down.
(The author is Head-Fixed Income, PGIM India Mutual Fund)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)