Perspective on RBI MPC by Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services
Below the Perspective on RBI MPC by Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services
RBI MPC: No action; balanced stance
* RBI’s unanimous (and expected) decision to pause in Feb (albeit with one dissent on the stance) stems from an improvement in external pressures since the Dec-25 MPC meeting, with domestic growth and inflation dynamics remaining comfortable. The MPC noted the improvement in system liquidity since Dec-25 on the back of its durable liquidity infusion (~Rs6.3trn since Dec-25), disappointing markets on any further infusion announcements (Gsec yields up across the board 4-5bps post-policy).
* We weren’t surprised as we see system liquidity to improve steadily by end-FY26 to ~1% of NDTL , limiting the need for more RBI infusion via OMOs. Pain from persistently high govt surplus, CIC leakage, and FX intervention drain will reduce in coming months.
* The macro views of the RBI MPC are largely stable, with slight rise in Q1/ Q2FY27 GDP growth forecasts to (6.9% and 7% respectively), reflecting the better external environment. Inflation forecasts also saw a slight increase, largely due to base effects while momentum is expected to remain benign (esp. for inflation-ex precious metals). There will be revisits on inflation and growth forecasts as the new series kicks in Feb.
* While the MPC policy actions ahead may be sideways, implying limited chances of rate cuts (barring any external shocks), focus on monetary transmission will continue. Despite a fairly deep easing cycle, less than 10% of rate cut transmission is visible in bond yields in this cycle vs 88% in the 2019 cycle of 8 months and avg of ~83% for the past 4 easing cycles.
The bear-flattened sovereign curve, widening corporate bond spreads, and rising money-market and wholesale deposit rates underscore this friction.
* We believe bond bearishness—driven by a mix of structural, cyclical, and one-off factors—is likely to persist through rest of FY26, with the 10Y yield hovering in the 6.60–6.75% range.
FY27 may see curve flattening, albeit with the balance of risks appearing skewed toward a bear flattening.
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