Note to fixed income investors – Feb 2026
As per the consensus view, the MPC has unanimously decided to keep the rate unchanged at 5.25%, after the 25-bps cut in the previous meeting. Correspondingly, the Standing Deposit Facility (SDF) rate has been kept unchanged at 5.00%, and the Marginal Standing Facility (MSF) rate and the Bank Rate kept unchanged at 5.50%. The MPC also decided to continue with the neutral stance however, one MPC member. Dr. Ram Singh, continued to call for a change in stance from neutral to accommodative This retains the cumulative easing to 125 bps in 2025, amid resilient domestic activity and a benign near-term inflation outlook.
In FY26TD, RBI has injected durable liquidity worth INR 13.0 trillion including OMO purchases, buy/sell swap, and CRR cut. In the post policy press conference, the RBI governor re-affirmed that the central bank would provide sufficient liquidity “proactively and pre-emptively considering changes in government balances, CiC and FX operations to enable monetary policy transmission in “all” markets. (including bond yields, money markets etc.) Moreover, he emphasized that liquidity supplied would align with the productive needs of the economy. Transmission since the last policy rate cut has so far been incomplete on the back of tight liquidity.
RBI revised up its inflation forecast for FY26 by 10-bps to 2.1%. Q1FY27 and Q2FY27 inflation forecasts have also been revised upwards to 4.0% and 4.1%, respectively awaiting the CPI series that would be announced in the next inflation print.
RBI revised up its GDP growth forecast for Q1FY27 and Q2FY27 to 6.9% and 7.0%, respectively. RBI hasn’t given the forecast for the full year FY27 awaiting the new GDP series that would be released later this month.
In a shift in the market expectation versus the previous policy, the MPC commentary suggests RBI’s balanced approach in managing inflation pressures while ensuring adequate liquidity in the financial system. The market wished for more for information on OMO purchases and commitment over ample liquidity for prompt actions. With evolving global conditions and domestic demand dynamics, the RBI continues to assess macroeconomics indicators to guide further.
The bond market reacted negatively to the policy announcement, with the 10-year G-sec yield settling at 6.72%, a 9 bps drop versus the previous close of 6.63%. It continues to trade within a narrow band of 6.65%-6.73%. Lately, short-term rates have corrected significantly, following the G-sec market. The term spread between the 3-month T-bill and the 10-year G-sec is now ~125 bps, above yet close to the long-term average of ~120 bps. We expect the yield curve to remain range bond and expect GOI 10-year bond to trade in the range of 6.60% - 6.75% in near term.
Strategy for Fixed Income Investors
- With the decline in G-sec yields over the past twenty months, our overweight stance on duration has played out reasonably well and continue to focus on carry. As highlighted in previous notes, we shifted to a neutral stance and continue to expect limited capital gains from further rate declines. Long-term yields may remain sensitive to evolving growth-inflation dynamics, demand-supply balance in the borrowing program.
- Corporate bond spreads remain adequate, with AAA spreads still above long-term averages. In select cases, AA and A-rated bonds offer attractive spreads after adjusting for risk. Investors with a higher risk appetite may consider evaluating select high-yield strategies.
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