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RBI Policy: Extremely dovish with focus on growth and liquidity

ICICIdirect Research 05 Dec 2025 DISCLAIMER

Dovish monetary policy: RBI’s monetary policy meeting turned out to be extremely dovish with the Repo rate of 25bps, OMO announcement of Rs 1 lakh crore and a 3-year USD/INR Buy Sell swap of USD 5 billion this month to inject durable liquidity into the system.
What led to rate-cut despite market being divided: The rate cut announcement stem from the fact that even medium-term inflation expectation at around 4% is offering comfort to reduce real rate to 1.25% (Repo at 5.25% minus Inflation at 4%). RBI stated that the underlying inflation pressures are even lower as this 4% inflation has a 50bps impact of the impact of increase in price of precious metals. RBI further stated that the “the growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum.”
GDP and Inflation projection: RBI reduced its inflation forecast for FY26 to 2% from 2.4% and for Q1FY27 it is reduced to 3.9% from earlier forecast of 4.5%. GDP growth for FY26 is now expected at 7.3% from earlier forecast of 6.8%. Q1FY27 growth is now projected at 6.7% as against earlier projection of 6.4%. Fresh Q2FY27 real GDP growth is projected at 6.8%. Effectively GDP growth is falling 50bps from FY26 (7.3%) to H1FY27(6.8%) and the same has led to RBI cutting rates to support growth.
Market reaction: 10-Year bond yield fell around 3-4 bps post the policy announcement.

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