India RBI Pivot 2026: Inflation Glide, Malhotra Easing Cycle, and the JPM GBI Bond Re-rating

The Malhotra succession and the regime break of December 2024 #

Shaktikanta Das ended a six year tenure as RBI Governor on December 10, 2024, the longest term in office since the 1980s and the longest serving governor in the inflation targeting era that began with the May 2016 amendment to the RBI Act. His final MPC meeting on December 6, 2024 held the policy repo rate at 6.50 percent for the eleventh consecutive review, against a 4 to 2 vote, with external members Nagesh Kumar and Ram Singh dissenting in favor of a 25 basis point cut. The hold reflected the October 2024 CPI print of 6.21 percent, which breached the upper bound of the 4 percent plus or minus 2 percent flexible inflation target framework codified in the 2016 amendment, the first breach of the upper tolerance band since August 2023.

Sanjay Malhotra, the outgoing Revenue Secretary at the Ministry of Finance, was appointed Governor on December 9, 2024 and took office on December 11, 2024 for a three year term. The Cabinet appointment was announced 24 hours before Das demitted office, the shortest transition window in two decades, and signaled a deliberate continuity of the inflation targeting framework with a fiscal sympathetic temperament. Malhotra had served at the Department of Financial Services and as Secretary of Revenue, and his confirmation hearings emphasized the symmetry of the 4 percent plus or minus 2 percent band rather than a tilt to either bound. Markets read the appointment as dovish at the margin, and the OIS curve repriced 35 basis points of cuts into 2025 within the trading week.

CPI glide and the food shock unwind #

The October 2024 headline CPI of 6.21 percent peaked a cycle that began with the Q3 2024 vegetable spike, when MoSPI's vegetable sub index rose 42.2 percent year on year on tomato, onion, and potato shortages tied to deficient summer rains across Maharashtra, Karnataka, Andhra Pradesh, and West Bengal. The kharif harvest from late September delivered the textbook reversal. Headline CPI fell to 5.22 percent in December 2024, 4.31 percent in January 2025, and 3.61 percent in February 2025, the lowest reading since July 2019 and 39 basis points below the 4 percent midpoint. Core CPI printed 3.6 percent across the same window, anchored by goods disinflation and services moderation, and stayed inside the 3.5 to 4 percent corridor that defines RBI's comfort zone.

The disinflation matters operationally because the MPC is mandated by the Reserve Bank of India Act to bring CPI to 4 percent on a forward looking basis, not to defend a corridor. With headline below 4 percent for two consecutive prints and core anchored, the August 2024 stance change to neutral converted into the February 2025 cut without violating the framework. RBI's own forecast in the February 2025 Monetary Policy Report projected FY26 CPI at 4.2 percent against the FY25 print of 4.8 percent, a profile that supports the second cut delivered on April 9, 2025. The risk register is asymmetric: an El Nino reversal of the 2024 monsoon recovery, a crude shock from a Strait of Hormuz disruption, or a US 26 percent reciprocal tariff effective post the April 2 to July 9, 2025 pause window.

The MPC easing path: 6.50 to 5.50 #

The February 7, 2025 MPC delivered a unanimous 25 basis point cut to 6.25 percent, the first reduction since the May 22, 2020 pandemic emergency cut, and retained the neutral stance set in October 2024. The decision rested on three pillars: headline CPI durably below the 4 percent midpoint after January 2025, the FY25 NSO advance estimate of real GDP growth at 6.5 percent against FY24 outturn of 8.2 percent, and a Q3 GVA print of 6.4 percent year on year that confirmed the slowdown in private consumption and urban demand visible in the December 2024 retail sales tracker. The April 9, 2025 MPC followed with a second unanimous 25 basis point cut to 6.00 percent, again retaining the neutral stance, and Malhotra signaled in the post meeting press conference that further easing was conditional on the inflation outturn rather than the growth outturn, the Volcker style hierarchy that Das established and Malhotra has explicitly preserved.

The terminal rate question is the contested margin. The OIS curve at the April cut priced 5.50 percent by the December 2025 MPC, embedding two further 25 basis point reductions. RBI's internal neutral rate estimate sits at 1.4 to 1.9 percent in real terms, implying a nominal neutral of 5.4 to 5.9 percent against the 4 percent target. Two factors pull the cycle shallower than markets price. First, the Federal Reserve's glide from 4.25 to 4.50 percent at end 2024 to a 3.75 percent terminal in mid 2026 narrows the differential and constrains the rupee. Second, the FY26 Union Budget capex push of INR 11.21 lakh crore, against the FY25 revised estimate of INR 10.18 lakh crore, supports a recovery that may obviate further easing if it reignites core services inflation.

JPM GBI EM inclusion and the bond market re-rating #

JP Morgan included Indian Government Bonds in the GBI EM Global Diversified index from June 28, 2024, on a 1 percent monthly weight build that completed at the 10 percent index cap on March 31, 2025. The mechanical AUM tracking the GBI EM family is approximately USD 240 billion, and a 10 percent terminal weight implies passive demand of USD 23 to 25 billion across the build phase. With active overweighting and the Bloomberg EM Local Currency Government index follow on inclusion in January 2025, cumulative FPI debt inflows reached roughly USD 25 to 30 billion year to date by Q1 2025 per RBI Bulletin and NSDL data. The structural bid compressed the 10 year G Sec yield to 6.85 percent in Q1 2025, against 7.20 percent at the June 2024 inclusion start and 7.45 percent at the November 2023 announcement.

The duration take is concentrated in the 5 to 14 year FAR (Fully Accessible Route) basket of 38 securities, which carries no FPI cap and which JP Morgan uses as the inclusion universe. The flatter curve reduces the marginal funding cost on the FY26 net dated borrowing against the FY25 revised estimate of INR 11.6 lakh crore, and supports the fiscal consolidation glide from 5.6 percent of GDP in FY24 to a 4.4 percent target in FY26. The risk channel runs in the other direction during shocks. The January 2025 INR slide to 88.40 per dollar coincided with a two week reversal of FPI debt flows of USD 1.8 billion, and the sensitivity of the GBI EM weight to dollar strength and US rate volatility is the new transmission channel the OMC view tracks alongside the domestic policy path.

INR, intervention, and the external balance #

The Indian rupee printed an intra day record low of 88.40 per US dollar on January 13, 2025, breaking the prior 87.95 low set in late December 2024, on a combination of dollar strength after the November 2024 US election, FPI equity outflows of USD 13.5 billion across October to December 2024, and the post Trump tariff anticipation rotation. By Q1 2026 the rupee had stabilized near 87.00 to 87.40 per dollar, on the back of FPI debt inflows from the GBI EM completion and a partial closure of the rate differential with the Fed. The RBI's defense was substantial. Total FX intervention in FY24, on a net spot plus forward basis disclosed in the Monthly Bulletin and the Annual Report, totaled approximately USD 76 billion in gross sales, with reserves rising in absolute terms to USD 705 billion at the September 2024 peak before drawing down to USD 624 billion in late January 2025, the largest peak to trough drawdown of the inflation targeting era.

The current account context allowed the intervention without triggering a sudden stop. Q2 FY25 printed a current account deficit of USD 11.2 billion, or 1.2 percent of GDP, against USD 11.3 billion in Q2 FY24, a flat read that reflects services export resilience at USD 51.0 billion against goods deficit widening to USD 75.3 billion. The April 2 to July 9, 2025 US 26 percent reciprocal tariff window, with bilateral US India trade at USD 130 billion in 2024, is the next test. A pass through to the goods balance of half the announced rate, on a 6 month basis, would widen the FY26 CAD by 30 to 40 basis points of GDP and reopen the rupee defense question, with reserves at USD 642 billion in early 2026 still adequate at 11 months of import cover.

Banking system, credit, and the OMC playbook for the easing cycle #

The banking system enters the easing cycle in the strongest balance sheet position in two decades. RBI's December 2024 Financial Stability Report placed gross NPLs at 2.5 percent of advances at end September 2024, the lowest level since the 2010 series began, against 2.8 percent in March 2024 and a peak of 11.5 percent in March 2018. Net NPLs printed 0.6 percent, the capital adequacy ratio of scheduled commercial banks held at 16.7 percent against the 11.5 percent regulatory floor, and the provision coverage ratio sat at 77.0 percent. Credit growth moderated from the 16 to 17 percent FY24 pace to 11.2 percent year on year in the fortnight ending March 21, 2025, in line with deposit growth at 10.9 percent, and reflected RBI's November 2023 risk weight tightening on unsecured personal lending and NBFC bank exposures, which has since been partially unwound in February 2025.

The OMC playbook translates the macro into four moves. For corporate FX hedgers, the asymmetric carry favors USD INR hedges in the 87 to 89 corridor for FY26 imports, with a tail to 90 if the US tariff escalates after July 9, 2025; 6 month forward implied volatility at 4.6 percent prices a constructive risk reward. For fixed income, the 10 year G Sec at 6.85 percent and the 5 year at 6.55 percent capture roughly 60 basis points of duration upside if the 5.50 percent OIS terminal is realized, with the FAR basket carrying the residual index bid. For bank equity investors, the easing cycle compresses NIMs by 15 to 20 basis points across FY26 against credit costs anchored below 1 percent, leaving ROAs at 1.0 to 1.2 percent and ROEs at 14 to 16 percent for top private and PSU lenders. For multinational treasurers, the FY26 capex push of INR 11.21 lakh crore plus the private capex pickup, visible in Q4 FY25 capacity utilization at 75.4 percent, supports a 12 to 18 month window to lock in INR financing at the cyclical low before the 2027 election cycle reintroduces fiscal slippage risk.

Sources #

• RBI Monetary Policy Committee Resolution, February 7 2025
• RBI Monetary Policy Committee Resolution, April 9 2025
• RBI Monetary Policy Report, April 2025
• RBI Financial Stability Report, December 2024
• MoSPI Press Release on Consumer Price Index, February 2025
• NSO First Advance Estimate of National Income, FY25
• Union Budget FY26, Ministry of Finance Government of India
• RBI Annual Report 2023 to 2024 and Monthly Bulletin, FX Intervention Disclosures
• JP Morgan GBI EM Global Diversified Index Inclusion of Indian Government Bonds
• NSDL FPI Investment Data, Debt and Equity
• Reuters Mumbai, Rupee Hits Record Low of 88.40 per Dollar on January 13 2025
• Economic Times, Sanjay Malhotra Sworn In as 26th RBI Governor
• BloombergQuint, RBI MPC and India Bond Coverage
• Office of the United States Trade Representative, Reciprocal Tariff Action and 90 Day Pause, April 2025