Note to fixed income investors – 06 Jun 2025

MPC Surprises with 50-bps Rate Cut and 100-bps CRR Reduction; Signals Possible End of Rate Cut Cycle

Policy Actions to Support Growth

• Contrary to market expectations of a 25-bps cut, the Monetary Policy Committee (MPC) front-loaded monetary easing by reducing the policy rate by 50 bps to 5.5%.
• The Standing Deposit Facility (SDF) rate is now at 5.25%, and the Marginal Standing Facility (MSF) and Bank Rate stand at 5.75%.
•  Change in stance to neutral and a 50-bps policy rate cut – could indicate limited room for another rate cut in this cycle and possibly suggests end of the current rate cut cycle.

Liquidity Boost: Durable Infusion via CRR Cut

• To provide durable liquidity, the MPC decided to reduce cash reserve ratio (CRR) rate by 100 bps to 3% and will be carried out in four equal tranches of 25 bps each from the fortnight beginning September 6th.
• This cut in CRR is expected to release INR 2.5 lac crores of durable liquidity in the banking system, lower the cost of funding of the banks and support the monetary policy transmission.

Macro Implications: A Tactical Yet Measured Shift

• The magnitude of easing—50-bps rate cut, 100-bps CRR cut, and a neutral stance—suggests that the MPC may be nearing the end of the current rate cut cycle.
• Future action is likely data-dependent, with further easing contingent on significant downside surprises to growth.
• The MPC’s aggressive move signals concerns over faltering domestic demand and global uncertainties, even as inflation expectations for FY26 remain benign at 3.7%, aided by:
  •  Low crude oil prices
  • Expectations of a normal monsoon
  • Soft food inflation trends

Market Reaction: Short-Term Volatility in Bonds

• Bond markets initially cheered the cut, with 10-year G-sec yield falling 10 bps, though the move reversed quickly on expectations of a pause or end to rate cuts.
• The 10-year yield now trades at 6.19%, down from 6.48% in April, with the term spread (10Y vs 3M T-bill) at ~80 bps, below the long-term average of ~120 bps.
• With ample liquidity and transmission underway, bond yields are expected to remain range-bound near-term in the absence of adverse shocks.

Fixed Income Strategy: Time to Rebalance Duration and Explore Credit

• Our earlier overweight stance on duration has played out well over the past 18 months. Following today’s announcement, we revise our stance to Neutral on medium-to-long-term duration, as room for further capital appreciation narrows.
• G-sec yields have largely priced in easing, and long-end rates could turn more reactive to growth-inflation developments.
• Credit spreads remain tight in AAA segment due to limited supply. However, select opportunities are emerging in AA and A-rated papers where spreads look attractive after adjusting for risk.
  •  Investors with a credit risk appetite may consider high-yield strategies selectively, focusing on credit quality and structural strength.

Outlook: Policy Pivot Anchors Growth Revival

The policy pivot, combined with easing borrowing costs and improving capacity utilization, is expected to stimulate consumption and private capex, especially when seen in conjunction with recent tax announcements in the budget. The moves provide a well-timed boost to growth amid global uncertainty—though with limited room for further easing, the focus now shifts to execution, transmission, and macro data trends.

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