Debt Monthly for December 2025

As we approach the end of the calendar year, we find ourselves at a pivotal moment, with the market split on the likelihood of an upcoming rate cut. The key focus for investors in December will be the RBI’s policy announcement on December 5, 2025, followed by the Federal Reserve’s meeting on December 10, 2025. These decisions will be crucial in shaping the near-term outlook for markets. Looking ahead, the debt market is navigating a backdrop of stronger-than-expected economic growth, tempered by ongoing liquidity challenges.

Strong Q2 FY26 GDP Growth: A Positive Surprise

India’s real GDP grew by 8.2% YoY in Q2FY26, outpacing both RBI and consensus estimates. This strong performance was largely driven by robust private consumption, which grew by 7.9% YoY (the highest in three quarters) as well as a healthy 9.2% YoY growth in the services sector. On the flip side, agricultural growth remained weak, and net exports didn’t fare well. But overall, the growth mix continues to be more consumption-driven, which bodes well for domestic demand.

The industrial sector has seen better-than-expected performance in mining, though construction lagged behind expectations. The manufacturing sector is still growing steadily, with strong base effects and improved GST reforms playing a role.

Fiscal Deficit and Government Receipts

Turning to government finances, the fiscal deficit seems under slight pressure, with receipts up only 4.5% YoY by 7M FY26. This is well below expectations and indicates a probability of a shortfall for the year. Tax revenues, particularly from personal income taxes and GST, have been weaker than anticipated. Meanwhile, government spending has slowed for the third consecutive month, with capital spending growing. The Centre’s fiscal deficit at 52.6% of Budget Estimates in the first seven months of FY26 is the highest in five years, which may prompt a spending adjustment in the second half of FY26 to meet the deficit target. That being said, we expect the government to meet it’s fiscal deficit target for the year.

Tightening Liquidity and its Impact on Debt Market

From a liquidity perspective, we’ve seen a sharp tightening since mid-September, moving from a comfortable surplus to less than 0.5% of NDTL (Net Demand & Time Liabilities). This tightening is mainly due to the CIC (Currency in Circulation) being higher than anticipated and largely RBI’s FX intervention, which has drained liquidity despite the RBI’s efforts to inject funds through OMOs (Open Market Operations) and VRRs (Variable Rate Repos).

This tightening has resulted in a substantial reduction in durable liquidity (from Rs 5 trillion at its peak to around Rs 3.3 trillion). For the months to follow, generally CIC outflows are higher and if the RBI continues with its current FX intervention strategy, we could see further strain on liquidity. We estimate that the system may require an additional Rs 1.5 to 2 trillion in durable liquidity infusion to stabilize the surplus at around ~1% of NDTL.

OUTLOOK:

While growth is expected to moderate to around 6%-6.5% in H2 FY26 (which is also broadly in line with RBI estimates), and inflation is softening, the overall growth - inflation dynamics look comfortable. However, the tightening liquidity environment, Trade deal with the US and the demand supply dynamics – including the SDL issuances could make debt markets more volatile in the near term.

The RBI is unlikely to be aggressive with rate cuts, given strong growth. The key factor for the market will be not just the decision, but the tone of the policy. A cut now, amid low inflation, could signal the RBI’s focus on achieving its "aspirational growth rate" and/or suggest concern over upcoming trade negotiations, making it a more front-loaded measure. On the other hand, if the RBI expects a favorable trade deal and a stable inflation outlook for FY 27, it might pause the rate cuts, signaling the end of the easing cycle.

In either case, the market will be keenly focused on the tone and forward guidance in the upcoming policy.

We anticipate a cautious 25bp rate cut in December, though this is now less certain than earlier, with the probability of a cut dropping to 50%.

What can investors do?

For investors, this backdrop continues to favor spread assets such as State Development Loans (SDLs) and high-quality (AAA Rated) corporate bonds with a slightly lower duration. These instruments offer better yields without taking on excessive risk.

However, it’s important to stay cautious about credit and liquidity risks. Portfolios that mix AAA-rated corporate bonds with government securities (G-Secs) can provide a good balance between safety and return.

For investors with shorter investment horizons and a low risk tolerance, liquid funds remain the more suitable option.

Source: Reserve Bank of India (RBI), Ministry of Statistics & Program Implementation (MOSPI), Bloomberg

Disclaimer, Statutory Details & Risk Factors: The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate, and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Above article is authored by Quantum.

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