April taught us that the RBI’s focus shifted from inflation to growth. While food inflation remained a top concern in 2024, it’s definitely a thing of the past in 2025. On the other hand, growth expectations have only seen downward revisions. The IMF and the RBI expect the Indian economy to grow between 6.20% to 6.50% this year.
The RBI already delivered two rate cuts this year, taking the repo from 6.50% to 6.00%. But there’s room for rates to go lower. Given that March inflation came in at 3.34%, the RBI can risk triggering inflation to fuel growth. Allowing the repo to go to 5.50% or lower.
Interest rates are not the only tool in the RBI’s arsenal. The RBI has been conducting open market operations (OMOs) to buy government bonds. Between January and now, the RBI has conducted 13 auctions buying 3.6 Lakh Crores of bonds. May will witness another 1.6 Lakh Crores of bond buying.
When the RBI buys bonds, two important things happen. First, more liquidity comes into the financial system as the RBI transfers cash to primary dealers and banks in exchange for government bonds. Second, the government’s borrowing costs reduce as the RBI raises the demand side of the equation. The result of these consequences is that spending power within the economy increases. The government can raise capital at lower rates, and corporations and individuals have more access to funds.
This context allows us to rethink and realign our investment options. Equity investors must be more selective about where they put their money. Valuations are expensive, growth prospects are not promising, and uncertainty remains high. Bonds are attractively positioned and stand to gain from lower interest rates and better transmission. It’s fixed income’s time to shine.