As the Reserve Bank of India (RBI) prepares to announce its monetary policy decision on December 5, financial markets are balancing expectations of a rate cut against the backdrop of rising bond yields and a weakening rupee, with strategists parsing the likely trajectory for both debt and currency.

Fixed Income Outlook: A Dovish Cut in Focus
Suyash Choudhary, Head of Fixed Income at Bandhan Mutual Fund, expects a 25-basis-point rate cut, aligning with the central bank's prior guidance. The critical factor, he notes, will be the accompanying commentary.

• Key Ask: The market seeks reassurance of a "benign rate cycle" without volatility, alongside concerns about second-half growth momentum.
• Liquidity Support: Markets anticipate ~₹2 lakh crore in Open Market Operation (OMO) purchases over the next three months to support systemic liquidity—a "fair expectation."
• Yield Curve Play: Choudhary sees the best opportunities in the 5-to-8-year segment of the yield curve, which would benefit most from rate cuts and OMOs.
• Risk Scenario: If the RBI holds rates, a dovish guidance could stabilize yields, but hints of an early end to the easing cycle could trigger a 10 bps sell-off.

Currency Forecast: Mounting Pressure on the Rupee
The Indian rupee has depreciated nearly 4.5% in 2025, starkly underperforming other Asian emerging market currencies. Dhiraj Nim, Economist & FX Strategist at ANZ Research, forecasts further weakness.

• Near-Term Target: A move to ₹90 per US dollar is "very much on the cards," driven by a weak outlook for trade and capital flows and a widening current account deficit.
• Policy Dichotomy: Nim advocates separating monetary policy from currency management: "Rate cut for the economy and FX tools for FX."
• Competitiveness Concern: While the rupee's real effective exchange rate is below 100, expected inflation from mid-2026 could erode export competitiveness, necessitating gradual depreciation.
• Long-Term Forecast: ANZ forecasts the rupee at ₹91.5 per dollar by end-2026, assuming only moderate US dollar strength.

The Bottom Line
The RBI faces a delicate balancing act. A dovish 25 bps cut coupled with a commitment to ample liquidity (via OMOs) would likely satisfy the bond market and support growth. However, such a move, against a backdrop of deteriorating external balances, would add downward pressure on the rupee.

The central bank's challenge will be to reassure domestic debt investors about the sustainability of the easing cycle while managing currency expectations through potential intervention or rhetoric to prevent a disorderly slide. The December 5 policy will thus be judged not just by the rate action, but by the RBI's deftness in navigating these competing demands on a single decision day.