The Report dwells on RBI’s rate action, contextualising the impact of the same on yields and spreads same in a broad paradigm of inflation, growth, fiscal position, external sector, and liquidity. It argues that with inflationary concerns receding into the horizon, external factors and liquidity have emerged as primary concerns. A global glut is likely brewing as tariffs choke the economy, with some spillovers impacting India. Beyond the medium-term impacts, the unprecedented volatility in commodities and currency in the near term are of concern. Till now, RBI has used its toolkit effectively to manage currency and largely reverse the accelerated depreciation seen recently. Despite this recovery, rising EM risks and volatile capital flows point to a likely trend of gradual depreciation ahead, with FII debt inflows, ECB inflows also expected to moderate from the highs seen in FY25. Further, the system is now awash with liquidity, ensuring effective transmission of rates and consistent dip in Union G-sec yields. The Report concludes with a view on Union G-sec yields and spreads of SGS and corporates over this benchmark.
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