RBI Holds Rates Steady Amid Growth Momentum and Inflation Risks

Mumbai : Following the Reserve Bank of India’s (RBI) latest Monetary Policy Committee (MPC) meeting, HDFC Bank has released a detailed commentary analyzing the central bank's decision to maintain the status quo on policy rates. The bank notes that the RBI’s "wait and watch" approach is fueled by a robust domestic growth trajectory balanced against lingering inflationary pressures.

Growth Forecasts Get a "Trade Deal" Boost
The RBI has upwardly revised its GDP growth forecasts for the first half of fiscal year 2027 (H1 FY27), a move HDFC Bank attributes to recent international trade agreements.

• HDFC Projection: The bank expects a 20-30bps upward revision to its previous FY27 growth estimate of 6.9%.
• Drivers: Positive spillovers from newly announced trade deals and sustained economic momentum.

The Inflation Caution: End of the Rate Cut Cycle?
Despite the growth optimism, the RBI raised its inflation outlook for H1 FY27. HDFC Bank identifies several "upside risks" that could keep prices high:

• Rising Costs: Surges in precious and base metal prices along with higher input costs.
• External Factors: Potential supply chain or agricultural disruptions due to weather-related issues.

Terminal Rate: HDFC Bank suggests that the rate-cut cycle may have reached its conclusion, identifying 5.25% as the likely terminal rate heading into FY27.

Liquidity and Bond Market Outlook
While system liquidity has improved due to recent regulatory measures, HDFC Bank anticipates a complex environment for the bond market in Q4 FY26.

Liquidity: Conditions are expected to remain favorable for policy transmission without further RBI intervention this quarter.

Yields: However, bond yields may remain elevated due to a mismatch between supply and demand, rising global yields, and the market pricing in the end of the easing cycle.