The Reserve Bank of India’s latest monetary policy decision comes at a time when the domestic economy is grappling with rising inflationary pressures and an increasingly uncertain global environment. Escalating geopolitical tensions in West Asia, elevated energy prices, supply chain disruptions, and concerns over a deficient monsoon have prompted the central bank to adopt a cautious approach.

While maintaining the repo rate at 5.25% and retaining its neutral stance, the RBI has simultaneously introduced a series of measures aimed at stabilising the Indian rupee and strengthening investor confidence. According to Amit Somani, Deputy Head – Fixed Income, Tata Asset Management, the policy reflects a clear focus on preserving currency stability while balancing growth and inflation risks in a challenging macroeconomic backdrop.

Measures to stabilise currency

Reserve Bank of India (RBI) maintained Status Quo policy by keeping repo rate at 5.25% and keeping stance as Neutral. RBI has announced significant measures to stabilize currency. FY27 CPI Inflation outlook has been expectedly revised higher to 5.1% from 4.6% earlier, on account of continuing higher energy prices, supply-chain disruptions due to West Asia conflict and expectation of deficient monsoon. GDP Forecast for FY27 has been revised lower to 6.60% from 6.90% for same reasons. 

Currency Depreciation and elevated Current Account Deficit

Current monetary policy focus was clearly tilted towards supporting INR, while the policy rates were left unchanged. With Inflation headwinds continuing, policy rates will need to be adjusted upwards going forward. The biggest concern in markets was led by currency depreciation and elevated current account deficit (CAD) and this has been dealt with very strongly through forex measures.  Furthermore, Government has also announced scraping foreign portfolio investments from LTCG and withholding tax on G-secs. These Monetary as well as Fiscal measures will help attract foreign flows.

Liquidity to support economic activity

RBI again re-emphasised keeping ample banking system liquidity to support economic activity. We expect RBI will continue to conduct Liquidity operations in a way that will keep overnight rate at lower end of the policy corridor.

With strong measures undertaken for currency stability, we expect market to now stabilize around current levels. Geopolitical risk will continue to drive markets in the foreseeable future. We expect 10-yr G-sec to trade in 6.85% – 7.15% range. Short-term yields are also likely to trade lower from recent higher ranges of 7.80%-90% levels for 9-12 month papers.

In conclusion

These interventions have addressed key market concerns around currency depreciation and the current account deficit, creating conditions for bond markets to stabilise. Going forward, geopolitical developments, inflation trends, and currency movements will remain critical factors shaping the trajectory of interest rates and fixed-income markets.