Policy Outcome and Key Takeaways
The RBI Monetary Policy Committee (MPC) unanimously voted to keep the policy repo rate and the stance unchanged, broadly in line with market expectations. Earlier concerns around growth, which had arisen due to the absence of a U.S.-India trade agreement, have eased meaningfully after the announcement of the trade deal on 2 February 2026. This has reduced downside risks to growth and reinforced expectations of a prolonged pause in policy rates.
From a broader perspective, the RBI has already undertaken significant easing over the past few policy meetings through cumulative rate cuts and sizeable liquidity infusion. At this stage, the central bank is signalling a preference to assess the impact of past actions while remaining ready to respond proactively if conditions warrant.
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Liquidity Conditions and RBI Operations
The RBI Monetary Policy communication highlights the RBI’s proactive stance on liquidity management. System liquidity averaged around Rs. 0.8 trillion in December-January (approximately 0.3–0.5% of NDTL), below the RBI’s preferred comfort level of about 1% of NDTL. Durable liquidity, adjusted for government cash balances, has moderated from a peak of nearly Rs. 5 trillion to around Rs. 3 trillion over the last four months, largely due to increased dollar outflows and associated RBI FX sales that absorbed rupee liquidity.
To counter these pressures, the RBI has executed substantial liquidity-supportive operations. Between December 2025 and January 2026, it conducted net Open Market Operation (OMO) purchases of about Rs. 4 trillion and USD/INR buy-sell swaps totalling USD 15.1 billion. In the first week of February 2026, the central bank further supplemented this with an additional USD 10 billion USD/INR buy-sell swap and net OMO purchases of Rs. 0.5 trillion. As a result, banking system liquidity improved, with the net surplus rising to roughly Rs. 1.8 trillion as of 4 February.
Foreign exchange reserves have strengthened meaningfully, reaching USD 723.8 billion by end-January 2026, surpassing the previous peak of USD 703 billion recorded in September 2025. At the same time, the RBI’s forward book dollar position has expanded from USD 53 billion at end-August 2025 to USD 62 billion by end-December 2025, providing additional policy flexibility.
Looking ahead, the RBI has reiterated that liquidity support will remain data dependent and pre-emptive. The December-March period typically witnesses currency leakage of Rs. 1.5 trillion or more, and the central bank has indicated it will accommodate unanticipated swings in government balances, currency in circulation, and forex operations as needed. Overall, this suggests that liquidity conditions are likely to remain comfortably supportive, with a closer alignment of overnight rates to the policy corridor over time.
Growth Outlook
On the growth front, the RBI has modestly revised its FY26 real GDP growth projection upward to 7.4% y-o-y from 7.3%, reflecting resilient domestic demand and robust macroeconomic fundamentals. The conclusion of a trade agreement with the European Union, along with several other concluded or ongoing trade negotiations (UK, Oman, Europe, New Zealand) and the recently announced U.S. trade deal, together provide additional upside potential to India’s medium-term growth momentum.
For 1HFY27, real GDP growth has been marked up to 7.0% y-o-y, indicating confidence in the durability of the recovery beyond FY26. The Ministry of Statistics is also scheduled to introduce a new GDP and CPI series in FY27, with a revised base year and updated coverage of economic activities. This statistical revision may lead to some recalibration of headline growth and inflation numbers, but it does not alter the underlying constructive macro narrative.
From our standpoint at Growthfiniti Wealth, we believe the worst phase is behind us, with India’s growth trajectory poised for a modest yet broad-based recovery supported by policy measures, structural reforms, and improving external linkages.
Inflation Dynamics
Inflation remains benign. The RBI now projects headline CPI inflation for FY26 at 2.1% y-o-y, up marginally from 2.0% in the December 2025 policy. Importantly, inflation is expected to converge towards and stabilise near 4% in the first half of FY27, which is close to the RBI’s medium-term target.
Recent prints have been driven by subdued food inflation amidst favourable Kharif output, healthy Rabi sowing, and adequate reservoir levels, while core inflation remains contained. While the very low base of FY26 CPI could arithmetically lift FY27 inflation, this is largely statistical, and assuming normal monsoon and stable global conditions, we remain relatively unconcerned. Supportive trends in global crude prices and improving food supply dynamics further reinforce a benign inflation outlook.
Policy Stance, Rates and Market Reaction
Given the backdrop of subdued inflation and a gradually improving growth momentum, a pause in rates at this juncture appears justified. Cumulatively, the RBI has delivered 125 bps of repo rate cuts since February 2025, accompanied by a wide array of liquidity-supportive measures since the December 2024 policy. The current stance remains “neutral” with an emphasis on keeping inflation durably aligned to target while supporting growth, and it signals a more data-dependent, wait-and-watch approach going forward.
We believe monetary policy in India is now entering a phase of extended pause, barring a material deterioration in the global growth outlook or a sharp negative shock. Liquidity management will continue to be the central lever of policy calibration through 2026, with the RBI using OMOs, variable rate operations, and FX interventions to fine-tune conditions.
Following the policy announcement, the 10-year government bond yield firmed up by about 5-6 bps. This move appears to reflect a combination of upgraded growth projections, an overall benign but gradually normalising inflation path, and improved liquidity conditions, which collectively point to a reduced expectation of further aggressive liquidity infusion by the central bank. The absence of explicit additional commitments on OMOs also contributed to a mildly hawkish market interpretation.
Our View and Investment Implications
From an asset allocation standpoint, we draw the following inferences:
- Rates: The policy supports a stable to mildly upward-sloping rate environment in the near term, with further large-scale rate cuts unlikely unless there is a sharp global or domestic growth shock.
- Liquidity: System liquidity should remain in modest surplus, supporting money market instruments and shorter-tenor bonds, although volatility around government cash balances and FX flows will persist.
- Growth assets: The upward revision in growth projections and progress on trade agreements are constructive for medium-term corporate earnings and risk assets, subject to global risk sentiment.
At Growthfiniti Wealth, we continue to advocate a calibrated approach to fixed-income allocation, preferring high-quality issuers and a balanced duration profile, via tax efficient routes while remaining alert to opportunities arising from policy-driven shifts in the yield curve.
Disclaimer: Growthfiniti Wealth Pvt Ltd is a SEBI-registered Portfolio Manager (INP000009418). The information provided is for educational purposes only and not investment advice. Market investments are subject to risk.