RBI keeps policy stance unchanged, commits to adequate liquidity; rates likely on hold through FY27

Deepak Agrawal of Kotak Mahindra AMC shares RBI policy analysis

• RBI to hold rates for entire FY27
• India’s GDP growth is resilient
• Inflation likely to be at mid-point range of RBI inflation target

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In its 59th meeting held from February 4-6 (last policy for FY26), the Reserve Bank of India's Monetary Policy Committee (MPC) voted unanimously to keep the policy repo rate unchanged at 5.25%, which was in line with the market expectations.

Consequently, the standing deposit facility (SDF) rate remains at 5.00%, and the marginal standing facility (MSF) and bank rate remain at 5.50%. The MPC also decided to continue with the “neutral stance” with one member, Prof. Ram Singh, voting to change the stance to “accommodative”.

On the domestic front, the first advance estimate indicates robust real GDP growth of 7.4% for FY26, driven by private consumption and fixed investment. The services sector remains buoyant, agriculture is resilient, and the manufacturing activity is reviving. The RBI projected real GDP growth to sustain into Q1FY27 at 6.90% and Q2FY27 at 7.0%, which is marginally higher than the earlier forecast of 6.70% and 6.80%, respectively, while risks staying evenly balanced.

Headline CPI inflation remained subdued at 0.7% in November 2025 and 1.3% in December 2025, well below the tolerance band of 2–6%. Core inflation has also remained benign in spite of an increase in metal prices. Core inflation after removing the impact of gold stands at ~2.60% in December 2025. Risks to inflation remain volatility in energy prices and climate change.

The headline inflation for FY26 is forecasted at 2.10% by the RBI from an earlier forecast of 2.0%. The RBI forecasted Q4FY26 at 3.20% (from 2.90% forecast in the last policy). The outlook for Q1FY27 and Q2FY27 by RBI stands at 4.0% and 4.2% respectively, up from 3.90% and 4.0% in the prior forecast. Overall, the inflation numbers remain subdued with slight upward pressure from precious metal prices offset by overall benign conditions. The risks are balanced evenly.

Post this policy, we expect the RBI to be in a long pause given the following reasons:

* India’s GDP growth is resilient.

* On the external front, landmark trade deals such as with the European Union and a prospective US trade agreement (tariff likely to be reduced to 18% from 50%) augur well for exports, which will likely weigh positively on the growth front.

* Inflation is likely to be at the mid-point range of the RBI inflation target.

On the liquidity front, the RBI has proactively taken steps to infuse liquidity in the banking system. The RBI directed OMO (open market operations) purchase amounting to Rs 4.5 lakh crore, and forex buy/sell swap of $25.10 billion from December 2025 till February 5, 2026. The RBI further conducted a 90-day VRR auction of Rs 25,000 crore and a further 90-day VRR auction of Rs 1.10 lakh crore for January and February 2026 to infuse liquidity in the banking system.

Given the cumulative rate cut of 125 bps in this cycle, the weighted average lending rate of SCBs (scheduled commercial banks) has fallen by 105 bps for fresh rupee loans from February 2025 to December 2025. Additionally, the weighted average deposit term rate on fresh deposits has reduced by 95 bps during the same period. Though the transmission in the debt capital market has been muted due to various reasons, the RBI referred to tight liquidity over the last 2 months, an increase in the supply, and seasonal factors for a spike in money market rates. RBI is guided to keep sufficient liquidity in the system to enable transmission of rates.

In this season, the RBI's steady hand resembles a captain steering through swirling currents with a neutral rudder. Observers will watch for further developments as global conditions evolve and as the RBI responds to new data, ready to chart a course when the seas calm.

If the RBI continues to keep liquidity in the current format, then it may bring short-term rates lower, resulting in curve steepening. While the RBI is expected to be in a long pause and stay on hold for the entire FY27, we anticipate the 10-year G-Sec yield to trade in the range of 6.60-6.80% in the near to medium term.