Why the market is not buying “Goldilocks”

In a rare instance of exuberance, the RBI governor termed the present moment as “rare Goldilocks period” of the Indian company, after cutting the policy rates by 25bps and quietly opening the liquidity taps. This should have enthused the financial markets but to the contrary, markets have turned even more cautious; especially, the foreign investors. This market behavior phenomenon might raise several questions in the minds of small investors. For example, -

·         Whether the rate cut decision is driven by conventional macroeconomic and monetary policy conditions, i.e., to support growth, considering that growth rate is already high and above the RBI estimates or the decision is driven by non-monetary policy considerations, e.g., driving bond yields down in anticipation of larger borrowing targets in FY27, or to drive INR further lower to help exporters manage tariff situation well, etc.?

·         Is the RBI more concerned about global situation worsening impacting India’s external balance and a redux of 2013 like BoP crisis?

·         Is the RBI really confident about measures taken to stem FII/FDI outflows or it is accepting outflows as a fait accompli?

·         Is Inflation sustainably pivoted below RBI tolerance band or it's just seasonally down and may rise again in 2026?

·         Whether the RBI also does not rely on quality of GDP growth data and believes actual growth to be slower and hence feels the need for rate cut to provide support?

In my view, these doubts may be unfounded.

Summary of RBI policy statement

Policy rates and stance

Repo rate: cut by 25 bps to 5.25% (unanimous).

SDF: cut by 25bps to 5.00%

MSF / Bank Rate: cut by 25bps to 5.50%

Policy Stance: maintained “neutral” (one member wanted it to be accommodative) .

Growth outlook (RBI’s own numbers):

Q2 FY26 real GDP growth: 8.2%, six-quarter high.

H1 FY26: 8.0% growth, 2.2% inflation – RBI calls this a “rare Goldilocks period”.

FY26 GDP forecast raised to 7.3% (from 6.8%): Q3-7.0%; Q4-6.5%; Q1FY27-6.7%; Q2FY27-6.8%

Inflation outlook (this is the big story):

Q2 FY26 avg CPI: 1.7%, below the 2% lower band for the first time under FIT.

October 2025 CPI: 0.3% y/y – lowest in the current CPI series.

Food prices in Oct: –3.7% y/y; vegetables –27.6%, cereals –16.2%.

FY26 CPI forecast cut to just 2.0%: Q3-0.6%; Q4: 2.9%; Q1FY27-3.9%; Q2FY27-4.0%

Core ex-gold inflation in Oct: 2.6%; RBI says nearly 80% of CPI basket is now below 4% inflation, a broad-based disinflation.

External sector

CAD: 1.3% of GDP in Q2 FY26 (down from 2.2% a year ago).

Trade: Oct trade deficit $41.7 bn (all-time high).

Services exports & remittances are strong; RBI expects “modest” CAD for FY26.

FX reserves: $686.2 bn, >11 months import cover.

External debt/GDP down to 18.9%; net IIP improved.

FDI: gross +19.4% y/y in H1; net FDI +127.6%.

FPI: small net outflow of $0.7 bn so far in FY26, driven by equities.

Liquidity & operations

System liquidity: average ₹1.5 lakh crore surplus since the Oct meeting.

RBI announces two big additional moves: OMO purchases of G-secs worth ₹1,00,000 crore in Dec. 3-year USD/INR buy–sell swap of $5 bn this month.

Governor stresses

OMOs are for “durable liquidity”, not directly targeting G-sec yields.

LAF operations (repo/VRRR) handle short-term liquidity; both can run simultaneously.

Repo rate remains the primary monetary policy instrument.

Goldilocks

Growth: 8%+ in H1, with tax cuts, GST rationalisation, and capex doing the heavy lifting.

Inflation: crashed to levels that make inflation-targeting central bankers in advanced economies slightly jealous (and maybe a bit suspicious).

Credit conditions: Banks & NBFCs well-capitalised, low NPAs, credit growth ~11–13% and rising.

Policy support: The RBI has done four cuts this year, total 125 bps, latest repo at 5.25% with a neutral stance.

Primary reading

In my view, prima facie, disinflation has given RBI room; it’s using it to ease conditions without declaring a full-blown easing cycle. Durable liquidity addition may flatten the yield curve slightly; therefore, investors need to watch for an appropriate time to increase duration. To answer the doubts, my view is as follows:

Conventional macro driver: yes – inflation far below target plus expectation of only mild growth softening.

Non-monetary flavor: also yes – the OMO + FX swap combination clearly supports bond yields and provides FX/liquidity comfort.

External worries: acknowledged but framed as manageable; policy is not being tightened for external reasons.

Inflation: seen as temporarily too low but structurally under control; forecast path rises towards 4%, not above it.

Growth data: RBI leans into the official strength and even upgrades forecasts; no sign they’re cutting because they think “true” growth is collapsing.

I would therefore explain the rate cut by:

The cut is better explained by:

·         A genuine disinflation surprise,

·         A desire to re-align real rates downwards while growth is still strong,

·         And some prudence ahead of expected softening in growth, not a collapse.

Insofar as the near term market reaction is concerned, it may be driven by several matters that are technical in nature and unrelated to the policy measures.