After aggressive easing, the RBI is likely to stay on hold in February amid rising inflation and poor rate transmission, says Emkay
The Reserve Bank of India (RBI) is likely to keep policy rates unchanged at the February 2026 Monetary Policy Committee (MPC) meeting, following an aggressive 125 basis points of rate cuts over the past year, as inflation edges higher and monetary transmission remains weak, according to a report by Emkay Global Financial Services.
Emkay said the February MPC faces a relatively supportive external environment, aided by the recent US–India trade resolution and progress on a potential India–EU free trade agreement. These developments are expected to help stabilise India’s current account, foreign portfolio investor (FPI) flows, and the rupee after a period of heightened volatility.
However, the brokerage cautioned that inflationary pressures are set to rise as favourable base effects fade. Headline CPI inflation is projected to increase from an average of 0.8 per cent year-on-year in the December quarter of FY26 to around 2.9 per cent in the March quarter and further to about 4 per cent in the first half of FY27. With growth remaining resilient at the headline level, Emkay believes the RBI has room to pause and assess the impact of past easing.
A key concern highlighted in the report is weak monetary transmission. Despite substantial rate cuts and a durable liquidity infusion of nearly ₹18 trillion since December 2024, bond yields and lending rates have not responded meaningfully. Emkay noted that only about 9 per cent of the policy easing has been transmitted to 10-year government bond yields in the current cycle, compared with much stronger transmission in previous easing phases.
The report also pointed to a sharp rise in corporate bond spreads, elevated certificate of deposit rates, and a high credit-deposit ratio, all of which are constraining banks’ ability to lower lending rates. While system liquidity is expected to improve to around ₹2.4 trillion, or 0.9 per cent of net demand and time liabilities, by end-March 2026, Emkay does not see the need for additional RBI liquidity infusion in FY26.
Going ahead, the brokerage said the market will closely watch for any regulatory measures at the February MPC that could ease banks’ capital constraints and improve credit availability, even as the central bank stays on hold on rates amid a mixed domestic macroeconomic backdrop
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