RBI Monetary Policy: Fund managers weigh strong GDP, soft inflation, and INR depreciation concerns

Debt fund managers expect the Reserve Bank of India (RBI) to adopt a more dovish tone in its monetary policy announcement on Friday, December 5, as strong GDP data, soft inflation and a Rupee depreciation present a mixed backdrop for rates and bond markets. A recent Moneycontrol Poll estimates that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to cut repo rate by 25 basis points (bps) in the upcoming monetary policy.
Also read: Rupee’s slide to have only marginal impact on inflation; govt could better fiscal deficit target in FY26: PwC’s Banerjee
What fund managers expect
Recently, India’s July–September GDP growth came in at 8.2 percent, above expectations and strong enough for several forecasters to revise full-year real growth estimates to above 7 percent. At the same time, inflation has stayed unusually low due to favourable base effects, while the RBI’s recent dollar sales to stabilise the rupee have drawn out liquidity from the banking system and pushed short-term rates higher.
With this combination, the bond market is now watching whether the RBI acknowledges the liquidity strain and whether it signals, or announces, an Open Market Operation (OMO) purchase of government securities. As previously reported by Moneycontrol, such an OMO purchase in December would inject durable liquidity and help ease bond yields and short-term money market rates.
Fund managers say they are going into the policy with existing strategies rather than making last-minute changes, but the macro developments are shaping how they think the RBI will respond.
Quantum Mutual Fund’s Sneha Pandey said the growth numbers leave space for policy support. Even if growth in the second half slows to around 6 percent, she said, “You would still see close to 7 percent real GDP growth for FY26, which is huge.” She added that the government’s nominal GDP assumption of 10.1 percent “seems slightly ambitious now,” with inflation pointing to something closer to 9–9.5 percent.
Pandey believes that if the RBI wants to front-load support, “now is a better time than February,” as base effects may fade and inflation could rise later in the year. “Even if they don’t cut, they cannot come out and sound hawkish,” she said, noting that the market will be eyeing the narrative being presented.
Axis Mutual Fund’s Head of Fixed Income, Devang Shah added that the policy setup is challenging because “the RBI faces a weak rupee, low inflation and strong GDP prints.” While current inflation is “near zero,” he said forward inflation could rise due to base effects and food inflation normalisation, though GST cuts should keep it “roughly at 4–4.25 percent.” Shah said the market will be looking for either a rate cut or “clear liquidity-support guidance.”
Rupee pressures are central to expectations for liquidity measures. With the RBI intervening through dollar sales, liquidity has tightened and short-end rates have risen. This increases the likelihood that the RBI may turn to OMOs or similar tools to ease conditions.
Kotak Mahindra AMC’s Head of Fixed Income, Abhishek Bisen, said the currency backdrop limits the RBI’s ability to manage liquidity through the FX route. “From that point of view, the chances of OMOs are very bright,” he said. He added that any easing will only be effective if accompanied by a softer tone. “They cannot cut rates and sound hawkish. That will spoil the benefit of the rate cut.”
Also read: Gangbuster GDP, grumpy markets: What’s going on?
How managers are positioned
Pandey said Quantum is keeping duration in the 4–5-year range, with around 70 percent of the portfolio in short-end AAA corporate bonds and SDLs, and roughly 30 percent in long-term government securities. She said the long-end portion is a tactical hedge, and the fund is cautious about the supply of state development loans in the second half.
Similarly, Shah said Axis Mutual Fund reduced duration earlier and is holding steady going into the policy. Duration in its G-Sec fund is around 7.5–8 years, down from 11–12 years, while corporate and short-term funds are closer to three years. Shah said they continue to hold limited tactical long-end exposure that could benefit if the RBI signals liquidity support or announces OMOs.
Bisen added that Kotak’s portfolios continue to follow a barbell approach. He said it is “not necessary to cut duration” because the yield curve remains steep, and that the commonly used 2–4-year segment “is not necessarily the safest place” when policy eventually turns. Instead, the barbell structure, combining very short-term holdings with selected longer-term bonds, allows portfolios to respond better whether the policy turns dovish or remains cautious. He added that with inflation likely around 4 percent next year and growth around 6.5 percent, the underlying environment supports carrying duration.
Across fund houses, managers say the immediate market reaction will depend on how clearly the RBI addresses liquidity conditions.
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