In a unanimous move the Monetary Policy Committee this week decided to leave the repo rate unchanged at 5.5% while keeping the stance as 'neutral'. Markets were hoping and expecting some chance of a rate cut or a dovish hold if the cut didn’t materialise, however in the end, the Governor delivered a neutral hold but with hawkish elements and commentary.

The RBI believes that domestic growth remains resilient and is evolving as expected. Additionally, the Governor has chosen to look through recent low inflation prints and instead has pointed to future inflation projections which show that inflation is expected to exceed 4% in H1CY26. Uncertainty from US tariffs and its impact on growth (both domestic and global) and trade/financial flows require a close watch on assessing the potential impact on overall macroeconomic conditions. We believe that with inflation remaining below the target space, further rate easing will depend on evolving growth conditions. High frequency indicators point to signs of growth slowdown and this coupled with tariff uncertainty could lead to even higher risks to RBI’s projected growth offering a potential of another rate cut.

From a Corporate Credit Health perspective all metrics continue to be remain at good levels as measured over last 15-20 years be it interest cover, leverage, margins etc. For the Financial Sector while some increase in credit costs are being seen and incipient signs of higher delinquencies particularly in the lower income brackets, considering this is on the back of cyclical lows in credit costs the same is expected to normalize over time and be easily absorbed by capital buffers built over the past few years.

On margin, given the lower transmission of rates in the banking sector and greater competitiveness of the corporate bond markets, we observe more entities approaching the capital markets. This at a time when credit spreads are now at or above long-term median levels leading to adequate risk adjusted returns. Expected pick up in capex, M&A activity and issuers tapping the bond markets should result in good quality paper coming to the capital market.

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