OPINION Decoding the liquidity shift: Has the RBI engineered a stealth rate cut?

MPC to keep the repo rate unchanged to 5.25% and stance at neutral

• RBI may provide accommodation by providing ample durable liquidity
• MPC to keep the repo rate unchanged to 5.25% and stance at neutral
• Inflation to inch up in coming few months

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Upon observing the intersection of fiscal and monetary developments, the RBI’s upcoming monetary policy meeting on February 6, 2026 arrives at a particularly strategic moment—just days after the Union Budget was presented on February 1. Much like an intense mid-game position in chess or the shifting momentum in a closely fought cricket match, the economic landscape demands careful interpretation. The Union Budget has laid out the government’s fiscal priorities with the path to fiscal consolidation continuing. Markets now wait to see how the central bank positions its next move and commentary.

On the inflation front, the headline inflation for December 2025 was reported at 1.33% (provisional) up from 0.71% in November 2025. However, despite the uptick, the number is lower than the RBI’s median target of 4%. Food inflation has consistently remained negative over the last few months and was printed at (-)2.71% in December 2025 as compared to (-)3.91% in November 2025. Core inflation in December 3025 was estimated at ~4.53%, higher than ~4.34% in November 2025 supported partly due to increase in gold prices.

The new CPI series with base year 2024 (revised from base year of 2012) will be released on February 12, 2026. The inflation is expected to inch up in coming few months but likely to anchored around mid-point of RBI flexible inflation target range.

Growth indicators reflect resilience, with real GDP growth reported at 8.20% in Q2FY26 from 7.80% in Q1FY26 supported by growth in the manufacturing and construction activity (secondary sector) & Financial, Real Estate and Professional Services. India’s growth in FY27 is projected to be 6.80-7.20% as per the economic survey.

On the external front, the situation seems to be improving as India and the European Union signed “Free Trade Agreement (FTA)” in January 2026 along with recent progress on trade deal with the US. However, the risk to growth remains the heightened unpredictability in global political landscape as the international macroeconomic environment remains volatile, with persistent risks of supply side disruptions and tariff related uncertainties.

On the liquidity front, the RBI has conducted more than Rs 7 lakh crore open market operation (OMO) purchase in FY26 so far and currently the core liquidity stands at ~Rs 3.5 lakh crore. Banking system liquidity as on February 4, 2026 stands at ~Rs 1.95 lakh crore. Given this, we observe that the RBI has proactively taken steps to infuse liquidity in the banking system along with other measures like FX Swaps, VRRs etc.

The liquidity has improved significantly, the real barometer of liquidity is the MIBOR (Mumbai Interbank Offered Rate) which has dropped to ~5.04% form ~5.50% earlier. Now, one has to observe the trajectory of MIBOR if it will sustain at current level of around 5% and whether it is by design or by chance. In previous instances, the RBI has reacted very quickly to ensure that it remains close to 5.5%. Hence, we need to watch out for the behaviour of MIBOR to gauge the RBI stand on the same.

Additionally, India’s forex reserve was reported at record high of ~$709 billion as per the latest data indicating stronger position in the external front.

Despite an easing cycle with 125 bps of rate cuts in just 11 months—monetary transmission to the bond market has been strikingly weak. Long term yields have risen since June 2025, with the 10 year yield down only ~11 bps. As a result, the yield curve has steepened and both government and corporate bond spreads have widened, effectively breaking the rate cut transmission mechanism despite substantial RBI support to government borrowing.

Given the backdrop, the budget is focused on maintaining fiscal discipline and largely inflation neutral. GDP growth is predicted to be better than major economies, the pressure on INR has abated and the RBI may provide accommodation by providing ample durable liquidity (as demonstrated in recent past) resulting in MIBOR closer to 5.25% vs 5.50% which may be seen as an stealth repo rate cut and the same should help in the transmission of rates on bond market. However, we expect the MPC to keep the repo rate unchanged to 5.25% and stance at neutral.