Daijiworld Media Network - New Delhi

New Delhi, Nov 30: Hopes of a mild 25-basis-point rate cut by the Reserve Bank of India have largely dissipated, with fresh economic readings and global trends indicating that the central bank may opt for a status quo in its December policy review, according to an SBI Research report released on Sunday.

The analysis notes that central banks worldwide have largely shifted into a pause mode, albeit with regional variations, and while rate cuts continue to outnumber hikes, their frequency has dropped sharply. Equity markets, meanwhile, are showing signs of excess, even as Indian indices like the NIFTY 500 present a more balanced picture.

The report emphasises that corrective actions outside monetary policy are now essential, especially given distortions in the bond market. The yield gap between the overnight repo rate and the 10-year government security has widened significantly to 100–110 basis points, despite a cumulative 100 bps rate cut and reductions in the Cash Reserve Ratio. This divergence, it argues, reflects weakened policy transmission and heightened market misalignment.

SBI Research suggests that fostering broad-based growth without altering policy rates may require ushering in a “neutral regime” amounting to calibrated easing through a combination of yield management and liquidity tools. It urges the RBI to clearly communicate the difference between temporary and permanent liquidity actions to avoid market confusion and enable smoother alignment of short- and long-term liquidity measures.

The report further indicates that liquidity-driven calibrated easing within a neutral stance may be necessary to stabilise yields. Recommended steps include durable liquidity injections through open market operations, publishing a detailed OMO calendar, ensuring durable liquidity remains at 2–2.5 per cent of NDTL to complete the transmission of previous rate cuts, and including State Development Loans in liquidity operations to address widening spreads. It adds that a liquidity-neutral Operation Twist in both G-Secs and SDLs could help calm volatility and restore yield curve stability.

With the Monetary Policy Committee set to meet in the first week of December, the report underscores that the RBI’s communication and liquidity strategy may play a decisive role in shaping market sentiment and anchoring long-term rates.