Governor Sanjay Malhotra described the current macroeconomic backdrop as a “rare Goldilocks period”, marked by strong activity and controlled inflation, enabling the central bank to open the policy taps without stoking macro instability.
Alongside the rate cut, the RBI announced ₹1 lakh crore of open market operation (OMO) purchases in government securities for December, as well as a $5 billion three-year dollar-rupee buy-sell swap — a combination that analysts see as an unambiguously liquidity-enhancing package. Headline and core inflation are projected to stay at or below the 4% target through the first half of FY27, while growth is expected to moderate only slightly from current levels, giving the central bank space to boost credit and ease financial conditions.
But economists remain divided on whether the RBI has struck the right balance.
Samiran Chakraborty, Chief Economist at Citi India, said the central bank has “used the space that inflation has offered” and deliberately prioritised the growth-inflation dynamic over other risks such as lagging deposit growth and balance of payments pressures. According to him, the governor’s message — reinforced by proactive OMO guidance — is strongly dovish and is likely to be welcomed by bond markets, provided inflation stays benign.
Yet, the bond market reaction was far more muted. Neeraj Gambhir, Head of Treasury at Axis Bank, noted that despite the rate cut and large OMO announcement, yields ended “pretty much flat”, underscoring the market’s reluctance to front-load expectations. He sees only 5–10 basis points of further downside for bond yields unless the RBI scales up G-sec purchases in January–March.
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On financial stability, opinions were sharper. Former RBI Executive Director Mridul Saggar warned that the central bank may be “too generous” with liquidity, highlighting risks from extreme global valuations and the possibility that inflation could swing to either extreme of the RBI’s tolerance band. The world, he cautioned, is “sitting on a bubble”, with the cyclically adjusted price-earnings ratio at levels seen only during the dot-com era — a backdrop that could force abrupt rate shifts globally.
The dovish stance also raises questions for the currency. With lower rates and aggressive liquidity support typically exerting depreciation pressure, economists say the rupee may face short-term weakness, even though the FX swap gives the RBI additional intervention room.
Still, supporters argue the RBI’s move is well-timed. With inflation anchored and domestic growth resilient, the central bank appears confident that easing now can reinforce credit momentum without jeopardising stability. For now, the policy debate hinges on whether the RBI is capitalising on a fleeting Goldilocks window — or testing the limits of its policy comfort.
Below is the excerpt of the discussion.
Q: Samiran, your thoughts? Do you think the governor has managed to communicate as much dovishness, that we will see bond markets continuing to trend lower? Do you think this is a positive for growth?
Chakraborty: So, if you look at it, in this policy the RBI has used the space that has been offered by inflation, and also their growth guidance has been slightly softer than where the current growth rates are. So that itself has also provided some space for policy easing. And in our view, almost the entire focus of the MPC has been on this inflation-growth dynamic, and less on the other two factors that we thought could also be on the table, which are connected to financial stability—the issue of the balance of payments, and the fact that the banking system’s deposit growth is now lagging credit growth. But for the moment, that has not been the primary focus of the RBI, and that’s why the governor has sounded very dovish, not just through his rate cut but also by being very proactive about providing the OMO guidance for December. This will translate into the bond market thinking that, till the time there is any upside surprise on inflation, the RBI’s overall monetary policy approach is going to be very conducive for the bond markets.
Q: Neeraj, what’s your first sense about bond yields themselves? Are you seeing them substantially lower, or at least lower for now, say, until February before the Budget? How low does it get?
Gambhir: I think the bond market has not been as enthusiastically responding to the RBI policy moves off late. We’ve seen that with this 25 basis point rate cut plus a ₹1 lakh crore OMO, the market ended pretty much flat and similar to the level as the last time. I think gradually the market will buy into this rate cut as well, in my view, but I’m not seeing too much of a downside to the yields from here—maybe another five to ten basis points. A lot will depend on the total amount of G-sec purchases that the Reserve Bank does as part of its open market operations. The market was expecting around ₹2 lakh crore. We’ve already gotten ₹1 lakh crore for December, so we have to see what happens for the months of January and February–March. That could continue to support the bond market.
Q: Neeraj, I wanted to ask you another question that some bankers pointed out. Do you think bankers will pass it on at all? Some bankers said there is depositors’ resistance to lower rates, so there’s no question of cutting deposit rates. What would you say?
Gambhir: So, the pass-through of rates to the real economy actually starts with the lending side rather than the deposit side. We know about 60–70% of balance sheets are linked to EBLR, which is, in turn, the repo rate. So as soon as the repo rate is cut, within a quarter this part of the balance sheet gets repriced almost immediately, and the benefit is passed on to borrowers. As far as deposits are concerned, there is a bit of competition among the banks, and there is a chase of deposits that is going on. This intensifies as we get into the last quarter of the year. So, let us see whether there is sufficient liquidity in the system that can, in some sense, encourage cuts on the deposit side. But I think there could be a little bit of scepticism there. Let’s see if deposit growth picks up, which would then allow us to do some rate cutting on deposits.
Q: How do you see credit growth? Do you think banks will abandon things like home loans because you’re not able to bring down your cost of funds? Why would you go to a low-priced product? Do you think there will be a concentration on high-risk lending?
Gambhir: I think we’ve recently seen elevated credit costs on the unsecured side, and that episode is pretty recent for people to forget. I think it will have some bearing. So, I don’t see people abandoning products like mortgages, which may be low-yielding but are clearly far better in terms of credit costs. So, I would think that a combination and a mix of lending will continue, both on the retail as well as on the wholesale side.
Q: Samiran, what’s the sense you’re getting on the rupee? Do you think the fact that the governor has given so much liquidity is an indication that he’s going to intervene, that he’s going to supply as many dollars as needed because he now has this liquidity insurance? Will that scare some rupee bears?
Chakraborty: Theoretically, when rates are cut and the RBI is more active in the bond market through the OMOs, there would be a natural bias for markets to play the currency from the depreciation side, because the cost of carry becomes lower. However, as you rightly point out, both the OMO as well as this $5 billion FX swap give the RBI more space to intervene from two aspects. One is the liquidity aspect—there is now enough liquidity in the system, so they need not worry that even if they sell dollars, INR liquidity will tighten. The other is that the $5 billion adds to the RBI’s FX reserves, so optically the headline reserves number remains better even if they intervene. So, from both sides, the degrees of freedom for the RBI to intervene in the FX market increase because of these operations. But at a theoretical level, the RBI will have to be conscious that the market bias will be more from the short side.
Q: Mridul, would you worry that the RBI has been a bit too generous? Bankers have told us they are finding it difficult to pass the cut on because there is depositors’ resistance to lower rates, so they’ll pass it on more slowly. And the fear of excessive liquidity always means there can be a financial problem if suddenly inflation picks up or something happens. Do you think they’ve been way too generous?
Saggar: Absolutely, there’s a risk of it. The RBI has done what it could in terms of the rate cut. I think this is near the terminal point of the rate-cutting cycle, though for central bankers, never say never. And if you see the fan charts, there’s a probability that inflation could still slip below 2% within the 70% confidence interval, or could go above the 6% ceiling within the 50% confidence interval. So, rates could still move both ways. Markets may anticipate no rate changes now, but the world is sitting on a bubble with the cyclically adjusted price-earnings ratio at 40—levels which have only been seen at the dot-com bubble site, not even in the Great Depression or the global financial crisis. Should that happen, rates could move anywhere. We have seen 4% during COVID, and we have seen 9% during the global financial crisis as well as the dot-com bubble.
Q: Neeraj, what’s your sense—is the rupee depreciation at its end now?
Gambhir: No, I don’t think so. I think the key issue is that we have roughly a 1–1.5% current account deficit. Net capital flows into the country are almost flat, so we basically have to fund this deficit, and the only way to fund it is through RBI reserves. So, there will be pressure on the currency. Although it may not be as high, given the fact that the US dollar may also be on the depreciating path. But I do expect some weakness in the currency in the months to come, till such time as we see a reversal of capital flows, particularly in the equity market. So, I think that’s the key marker for us. There could be a short-term blip up in the rupee-dollar rate if we have a trade deal announced anytime soon—that could provide some support. But net-net, fundamentally, we are in a rupee-weakness regime.
Watch accompanying video for entire discussion.
