(MENAFN- KNN India) New Delhi, Aug 14 (KNN) The Reserve Bank of India's Monetary Policy Committee may contemplate additional policy rate reductions if forthcoming GDP data falls short of projections and the US Federal Reserve initiates substantial rate cuts in response to deteriorating labor market conditions, according to an HSBC Mutual Fund analysis.

The RBI-MPC has maintained its GDP growth forecast for FY26 at 6.5 percent during its most recent policy meeting. The central bank projects quarterly growth rates of 6.5 percent in Q1, 6.7 percent in Q2, 6.6 percent in Q3, and 6.3 percent in Q4.

The monetary authority opted to keep the repo rate steady at 5.50 percent while maintaining its neutral policy stance, following earlier frontloaded cuts totaling 100 basis points.

The committee emphasized that its decision to pause rate adjustments was influenced by recent reductions, while acknowledging that global uncertainties and potential tariffs present growth risks.

However, the MPC downplayed the probable inflationary impact of these challenges. The HSBC report noted that further monetary easing opportunities could emerge if GDP figures underperform expectations.

The analysis indicates that the MPC will likely maintain its data-dependent approach to policy decisions. Additional easing possibilities may arise if economic growth disappoints and the US Federal Reserve implements aggressive rate cuts to address weakening labor market conditions.

Until such catalysts materialize, government securities rates are anticipated to remain within established trading ranges.

Liquidity conditions are expected to serve as the primary driver of bond yields, with the RBI projected to continue providing sufficient liquidity to the banking system to ensure complete transmission of previous rate cuts.

Currently, corporate bonds in the 2-4 year maturity segment offer attractive spreads of 65-75 basis points over Indian government bonds, positioning them to benefit from potential spread compression.

As the monetary easing cycle approaches its conclusion, market focus is shifting toward corporate bonds to capture yield advantages. The report suggests an overweight allocation to 2-4 year corporate bonds given current market dynamics.

The RBI-MPC is expected to adopt a measured approach through the end of calendar year 2025, particularly as inflation projections remain subdued until the fourth quarter of FY26.

Liquidity conditions should remain favorable, with cash reserve ratio cuts scheduled to take effect within one month, facilitating the transmission of previous policy easing into lower borrowing costs.

The analysis suggests that potential US Federal Reserve rate cuts beginning in September could provide the RBI with additional policy flexibility.

With inflation expectations remaining benign, India's growth trajectory will likely dominate discussions at upcoming policy meetings. The RBI Governor has confirmed that policy decisions will continue to be made on a meeting-by-meeting basis, remaining contingent on incoming economic data.

(KNN Bureau)

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