RBI Likely to Hold Rates as Growth Momentum Rises

The Reserve Bank of India may opt to pause repo rate cuts in its December policy review amid stronger-than-expected economic growth, according to a report by SBI Research.

The report said expectations of a 25 basis point rate cut have weakened following a closer reading of robust Q2 GDP data and shifting global monetary trends. Central banks worldwide are increasingly adopting a pause-driven policy stance, with fewer rate cuts compared to earlier cycles.

SBI Research noted that while global equity markets appear stretched, Indian markets remain relatively better aligned with fundamentals. However, concerns persist in the government securities market, where weak transmission of past rate cuts is evident.

Despite a cumulative 100 basis points cut in the repo rate and reductions in the Cash Reserve Ratio, the spread between the overnight repo rate and the 10-year government bond yield has widened to over 100 basis points. This growing divergence, the report said, signals inefficiencies in monetary transmission.

Rather than further rate cuts, the RBI may need to move towards a neutral stance with calibrated easing, focusing on liquidity management and yield targeting. Clarifying the distinction between temporary and permanent liquidity operations could help improve market confidence and reduce volatility.

The report suggested that durable liquidity tools such as open market operations could play a bigger role in supporting transmission. Publishing a clear calendar for such operations may also help markets align expectations across the yield curve.

To stabilise long-term yields and reduce volatility, the RBI could consider measures such as liquidity-neutral Operation Twist, along with inclusion of State Development Loans in durable liquidity operations.

According to SBI Research, these steps would allow the central bank to support growth and market stability without altering its policy rate, especially as the economy shows signs of broad-based expansion.

[Except for the headline, this article has not been edited by the Benefit News editorial team and is published directly from the IANS news feed.]