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Informist, Friday, Feb. 6, 2026

 

NEW DELHI – Madhavi Arora, chief economist, Emkay Global Financial Services, said the following on the Reserve Bank of India's sixth bi-monthly monetary policy for 2025-26 (Apr-Mar) detailed on Friday:

 

The RBI's unanimous decision to pause in February, albeit with one dissent on the stance, stems from an improvement in external pressures since the Monetary Policy Committee's meeting in December, with domestic growth and inflation dynamics remaining comfortable. The MPC noted the improvement in system liquidity since December on the back of its durable liquidity infusion, of nearly INR 6.3 trillion, disappointing markets on any further infusion announcements.

 

We weren't surprised as we see system liquidity improving steadily by end-FY26 to ~1% of net demand and time liabilities, limiting the need for more RBI infusion via open market operations. Pain from persistently high government surplus, currency-in-circulation leakage, and forex intervention drain will reduce in the coming months.

 

The macro views of the RBI MPC are largely stable, with slight rise in Apr-Jun and Jul-Sept 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. There will be revisits on inflation and growth forecasts as the new series kicks in February.

 

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 versus 88% in the 2019 cycle of 8 months and average of ~83% for the past four 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 the rest of FY26, with the 10-year yield hovering in the 6.60–6.75% range.

 

FY27 may see the curve flattening, albeit with the balance of risks appearing skewed toward a bear flattening.

 

Even as some one-off factors reverse in FY27, the structural pain, unless addressed, will cast a shadow on bonds and imply a high-for-long state.  End

 

Compiled by Krity Ambey

Filed by Avishek Dutta

 

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