India Real GDP for the quarter ending September came strong at 8.2% (median growth rate of 6.5% in this GDP series), while the nominal GDP growth rate declined to 8.7% (median growth rate of 11.5%). The strong real GDP number was largely on the back of deflator which declined to 0.5%, besides the effect of front loading of Indian exports to US, and front-loaded government capital expenditure. In the current India GDP estimation methodology, estimates are first derived for nominal GDP for most components of GDP, and it is then deflated to get real GDP estimates. India does not use double deflation, and the consequence is that whenever there is a sharp decline in inflation, the headline real GDP starts looking very high with a payback few quarters later. The current high frequency India growth indicators are not anywhere suggestive of such high real GDP growth, which we expect to reverse in FY27. Most high frequency indicators like tax collection, core inflation, industrial growth, credit growth and imports are suggesting middling growth impulses.

We expect inflation to remain benign. Food inflation is low, and with a good monsoon and healthy reservoir levels, it should stay subdued. Core inflation also shows no signs of overheating. Additionally, strong Chinese exports at lower prices are adding to disinflationary pressures in India like much of Asia.

In the latest monetary policy meeting, RBI monetary policy committee (MPC) reduced the policy rate by another 25 bps, taking overall easing in this cycle to 125bps. MPC delivered a dovish cut with a unanimous 6-0 vote, and one member advocating a shift to an accommodative stance. Beyond the rate cut, RBI announced Open Market purchase of ₹1 trillion of Indian government bonds and a 3-year buy-sell FX swap of US$5 billion. Importantly, there was no signal that this would be the last cut and we expect more easing in upcoming quarters as inflation is likely to stay below RBI's mandate. We see scope for at least one more rate cut in this cycle given low inflationary pressures and expected decline in growth numbers. Furthermore, we anticipate a large quantum of additional OMOs over the next 12–15 months to provide liquidity to the banking system.

Pressure on INR on the back of Trump tariffs on India remains the key concern. The pressure has started since the announcement of liberation day tariff on India and INR has depreciated by 5.7% since then on nominal terms. However, RBI's forex reserves at 11 months of imports are at comfortable levels to prevent a major slide from current levels and RBI is intervening regularly in market to prevent volatility. India's Balance of Payment account is likely to show only a moderate deficit due to decline in exports to US. However, based on Real Effective exchange rates, INR has already reached the weakest level in more than a decade suggesting deep undervaluation and potential for a sharp rebound in INR as and when the trade deal with US gets settled, which we expect to happen in next few months.

To summarize, in next 3-6 months, we think rates would settle lower from the current levels as RBI conducts more OMOs and delivers one more rate cut. We recommend investors with 1 month+ horizon to invest in our 3-6M Financial Services Index fund, 3 months+ to invest in our ultra short or low duration fund and 1 year+ to invest in our short-term funds (Short term / Corp Bond / BPSU category). Investors having a 2Y+ horizon should look at our Income Plus Arbitrage Active FOF given tax efficiency. We recommend tactical allocation to our ABSL Government Securities Fund, which is well placed to benefit from the decline in bond yields and compression in curve steepness.

Source: Reserve Bank of India, World Bank, International Monetary Fund, Bloomberg, CEIC

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