SBI Capital Markets report on RBI's Monetary Policy titled "The Art of Doing Nothing - Status Quo For Longer?"

The Executive Summary of the Report is as follows:

MPC keeps rates unchanged with shift in commentary on growth-inflation dynamic

The Committee decided unanimously to maintain repo rate down to 5.25%, with no changes made to the SDF and MSF rates. The stance was also retained at "Neutral" by a similar 5-1 margin. However, this time, the outlook of the MPC was encoded in the messaging with regards to inflation and growth. The CPI projections for FY26 and H1FY27 were revised upwards, with similar shifts northwards for growth [it must be noted that both growth and inflation projections remain subject to the imminent base revision]. The inaction of the present policy, coupled with the shifts in the "Bankspeak", indicate that the chances of future cuts stand diminished.

Inflation likely to have bottomed out as precious metals embellish Core figures

The glittering growth in precious metal prices prompted an upward revision FY26 CPI estimate to 2.1% y/y (earlier 2.0%). Further, bumps up were seen for Q1 and Q2 of FY27, with Q2FY27 now seeing inflation above the target of 4%. Even though the Governor was quick to clarify that barring precious metals, underlying inflation pressures remain muted, this indicates that the nadir of consumer inflation may be behind us. Geopolitical pressures and change in basket may stiffen India's crude purchase price, and base effects may play a role in FY27, even as food inflation is of lesser concern barring short-term supply issues.

Growth forecast rosier than before as trade deals complement domestic momentum

The RBI projects real GDP growth for FY26 to now exceed the FAE and print 7.4% y/y (earlier: 7.3%), with 0.2pp upward revisions made to Q1 and Q2 of FY27. Domestic drivers remain intact, as evidenced by healthy trends seen in high frequency indicators including PMI (composite PMI at 58.4 is amongst the highest in the world), IIP (7.8% y/y recorded in Dec'25 is the highest since Oct'23), and railway freight volume. Further, since last policy, the agreements with the EU and USA have cleared up some clouds on the external horizon. Interestingly, the RBI's projections for H1FY27 provide an upward tilt to the nominal GDP - something which could come in very handy in a fiscal where meeting the tax revenue and deficit targets could be challenging.

Easing of external sector pressures would help RBI keep more of its policy arsenal intact

Despite a hostile external environment which prevailed then, net FDI grew multifold on-year to USD 5.6 bn in 8MFY26. The change in mood after the announcement of an India-US trade deal has got the FPIs interested again in the equity market. Trade survived the brunt of the 50% tariff relatively unscathed in CY25. All these indicate that the external situation is more manageable than before, with the INR saluting these measures and bouncing back from a historic low against the USD. Importantly, this affords RBI an opportunity to shore up any expended forex reserves and keep INR/USD Buy/Sell swaps an option for liquidity.

Only platitudes on liquidity in this policy even as the Governor promises agility

Based on the Central Bank's tireless efforts to maintain liquidity ample using a mix of OMO, swaps, and VRRs, besides help from FPIs who returned to the markets in Feb'26, liquidity position now stands at a comfortable surplus. While not promising any new measures, the Governor assured the markets that the RBI would continue to remain nimble in its approach to maintain sufficient liquidity to feed burgeoning credit requirements and ensure silken smooth transmission. With banking system liquidity (as per Bloomberg index) surplus reaching Rs. 2.15 trn, a combination of VRR and VRRR could be used in Q4, which usually sees outflows.

Measures to ease credit flow continue, with important markets unlocked for banks

Saluting the heady credit growth in the economy, some measures to further boost this were announced. Draft directions which allow commercial banks to extend finance to REITs, subject to appropriate prudential safeguards will soon be launched. Rationalisation of extant regulatory norms of UCBs, particularly with respect to unsecured loans through a tiered approach, will also soon be mooted through draft directions. Further, a draft amendment doing away with the registration requirement for Type-I NBFCs with asset size not exceeding Rs. 10 bn, may be in the works. Moreover, the limit of collateral free loans for MSEs has been enhanced from Rs. 1 mn to Rs. 2 mn, applicable from 1 Apr'26. Finally, a regulatory framework to enable the introduction of derivatives on credit indices and total return swaps on corporate bonds will be issued shortly for public feedback. These measures are expected to further improve the flow of debt.

Yields show hardening bias on a mix of fiscal and monetary factors

The Union Budget, with its massive Rs. 17.2 trn gross borrowing programme, and the likelihood of a hefty State borrowing plan in FY27 provided a floor for yields. The monetary policy statement cemented this floor, by indicating that the perception of the growth-inflation dynamic has shifted towards one in which chance of further rate cuts is remoter. Reading the lines and between them, the bond markets reacted by pushing up benchmark 10Y Union G-sec yield by ~5bps to ~6.70%. The yield curve is quite steep, with the spread between 3-month T-bill and 10Y Union G-sec almost at ~140 bps.

Source : Equity Bulls

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