High frequency India growth indicators remain mixed. Among positive indicators PMI data continue to remain very strong and the highest among major economies and there is a pickup in bank credit growth and M3 money supply. Although there is commentary of pick-up in consumption in festive season given significant cut announced in indirect taxes which came into effect in September, what will be crucial would be to see the trend in sales after the festive season is over. While there is a pick in auto sales number in festive season (Navratri and Diwali) but if we account for the postponement effect (since purchases were deferred when GST cut was announced in August) the cumulative GST announcement + festive sales growth is modest. Latest data from E-way bills which is a lead indicator of economic activity is showing decline in momentum. IIP data (till September) has been stable.

Central government is on course to meet its fiscal deficit targets for FY26. Fiscal deficit in 1H stood at 36.5% of full year targets compared to median level of 39%. There has been some deceleration in expenditure trend in September, particularly in revenue expenditure even as capital expenditure momentum remained high. Receipts in 1H stood near median levels of 49.6% aided by strong RBI dividend. Tax collections are beginning to normalise after remaining low in much of the 1H due to pick up in income tax collection. However, crucial will be to assess the net effect of GST tax rationalisation given the interplay of lower rates with higher sale and better compliance. Collection in small savings accounts is running well ahead of budget estimates and create a healthy buffer for fiscal accounts should there be any pressure on government’s tax collection front.

Inflation continues to stay very low with headline CPI Inflation dropping to record and series low of 0.25% y-y in October 2025. Decline in inflation is broad-based and most categories witnessed very low inflation with the exception of household goods and services which was pushed up by Gold/Silver prices. Food inflation remained negative for the second consecutive month with deep deflation in vegetables, pulses and spices and most other segment of food inflation including the sticky components like cereals, also witnessing near zero inflation. Core-core inflation (core inflation ex Gold, Silver, Petrol, Diesel) also came very low at 2.64%. With the record low October data, average CPI inflation in FY26 has declined to 1.92%, below the lower end of RBI inflation target zone. Inflation in 2QFY26 (July-Sept) quarter at 1.71% is already below RBI’s 2-6% inflation target and with next month’s inflation also running below 1%, there is good chance of inflation running below 2% for the second consecutive quarter. Moreover, with water level in reservoirs at comfortable position helping rabi sowing and much of GST rate cut still to pass through in inflation data, the outlook for inflation continue to stay benign.

Trade negotiations between India and US are ongoing and expectations are of at least some reduction in tariff rates, with decent possibility of completion of some trade deal sooner than later. Meanwhile the impact of steep tariff continues to be seen in the external account front with INR staying near lows. RBI has been attempting to reduce the pressure on INR selling dollars. The resultant drain of INR liquidity has opened space for more GSec OMO purchases (at least 1 lakh crs for the rest of the fiscal) from RBI.

We note that while the RBI kept policy rates unchanged in 1st October MPC meeting, the communication coming from RBI has been on the dovish side. Governor had expressed concerns on slow transmission of monetary policy especially given the persistently high bond yield, despite the 100bp rate cut and pointed out space for further decline in yields. There is strong indication of RBI OMO purchases in secondary market to support rates. Despite the 100bp rate cut already done by RBI, the transmission in bond market has so far been muted. RBI has consistently reiterated its objective of ensuring effective transmission of monetary easing and reducing lending rates across both banks and the bond market.

Moreover, with inflation staying very low and expected to remain low for at least few more quarters, we expect further rate easing from RBI going ahead, and our base case is of 50bp more rate cut in the cycle including a December cut. We also note that real rates have risen significantly and are now at their highest since 2018, which gives a good entry point to investors. Given the positive borrowing calendar and likely support from monetary policy, we are quite constructive on Indian rates.

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 Debt Plus Arb 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. The current SDL spreads are on the higher side and provide good tactical opportunity for higher allocation to SDLs. We are also increasing SDL allocation in our ABSL Long Duration Fund, which would be a good opportunity for investors keen on locking in the high SDL rates.

Source: ABSLAMC Research

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