India should prioritise reforms to market microstructure over additional liquidity measures as rising bond yields and banking system pressures signal structural constraints, according to a report by SBI Research following the Reserve Bank of India’s latest monetary policy decision.
The Monetary Policy Committee (MPC) unanimously kept the repo rate unchanged at 5.25 per cent and retained a neutral stance, while revising GDP growth projections to 6.9 per cent for Q1 FY27 and 7 per cent for Q2 FY27, citing factors such as GST rationalisation, healthy rabi prospects and a benign inflation environment, SBI Research said.
However, bond yields climbed by close to 10 basis points after the policy announcement, the largest increase since the June policy, as markets had expected regulatory relief such as postponement or dilution of liquidity coverage ratio (LCR) norms, the report noted.
“The large supply of gross borrowings in FY27 is also acting as a constraining factor for softening of yields,” SBI Research said, adding that the LCR of many banks has dipped below 120 and is facing increasing pressure amid a widening gap between deposits and credit.
The decline in LCR is partly attributable to banks’ preference for wholesale deposits, which carry a higher run-off factor than retail deposits, the report added.
Against this backdrop, SBI Research said addressing market microstructure “is now more important than liquidity management,” even as the RBI reiterated that liquidity support would remain proactive.
The report recommended several steps, including refraining from conducting variable rate reverse repo operations even if call rates fall below the policy rate, undertaking more 90-day variable rate repos to aid banks in LCR computation, closely monitoring yield cut-offs at auctions and avoiding immediate recoupment of forex dollars to prevent signalling a depreciating currency bias.
The central bank has emphasised that net borrowings have “barely moved up” in FY27 and should be the metric markets focus on. Net borrowing stood at Rs 11.7 lakh crore in FY27, compared with Rs 11.4 lakh crore during the pandemic-hit FY21, suggesting borrowing levels are not unusually large in historical terms, the report said.
Meanwhile, the rupee appreciated significantly after the policy, which SBI Research described as unexpected, adding that recouping dollars when the currency strengthens below 90 could be a better option for the RBI.
On inflation, the report highlighted that CPI inflation for FY26 is projected at 2.1 per cent, with Q4 inflation at 3.2 per cent. The upward revision was driven by higher precious metal prices, although risks remain from volatile energy costs despite bright food supply prospects supported by healthy kharif production.
The RBI has also committed to ensuring sufficient liquidity in the banking system to meet the productive requirements of the economy and facilitate monetary policy transmission, with the governor stressing that liquidity concerns would be addressed pre-emptively.
Beyond rates, the policy introduced a range of developmental and regulatory measures. These include comprehensive instructions to curb mis-selling of financial products and harmonising guidelines on the use of recovery agents for loan collection to improve monitoring and ensure uniform practices.
The central bank is also reviewing the framework on customer liability in unauthorised digital transactions as banking frauds rose sharply to 23,879 cases in FY25 from 13,494 in FY23. Proposed safeguards include calibrated protections such as lagged credits and compensation of Rs 25,000 for small-value fraudulent transactions.
In a boost to financing channels, banks will be permitted to lend to real estate investment trusts or take equity in operational projects, a move SBI Research said supports the government’s asset monetisation plans and improves fund flows to the sector.
The RBI has also enhanced the collateral-free loan limit for micro and small enterprises to Rs 20 lakh from Rs 10 lakh for loans sanctioned or renewed from April 1, 2026, which the report said would ensure higher credit to the sector.
Separately, assets under management for gold loan non-banking financial companies are expected to expand by 30–35 per cent in FY26, supported by rising gold prices, although expanded branch authorisation could intensify competition with banks’ gold loan portfolios.
Measures aimed at deepening financial markets, including derivatives on credit indices and total return swaps on corporate bonds, could open another route for funds into corporate debt, while relaxed investment rules under the voluntary retention route may attract more long-term foreign portfolio investment into government securities over time, SBI Research said.
Still, the report cautioned that FY26 has ended on a cautious note, with the rate pause shaped by multiple macroeconomic factors, including geopolitical risks and leadership changes at the U.S. Federal Reserve. The trajectory of inflation will need close monitoring once the new CPI series is released, before policy direction for FY27 becomes clearer. |
