Monetary Policy Review – February 2026

In an expected move, the Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 5.25% and retained the ‘neutral’ policy stance. While the decision to keep repo rate unchanged was unanimous, one out of six members voted for stance to be changed to ‘accommodative’ from ‘neutral’.

The Committee noted that the “outlook for CPI inflation in Q1 and Q2FY27 continues to be benign and near the inflation target” due to favourable outlook on food inflation and range-bound core inflation. The Committee was of the view that given the prevailing macroeconomic conditions, current policy rate was appropriate.

The RBI indicated that it will be data dependent from hereon and in this sense the new series on CPI and GDP (both scheduled to be launched in February 2026) will have a bearing on the future course of monetary policy.

On Growth: The RBI highlighted that the global growth showed remarkable resilience in CY25 which was driven by trade front loading, less impact of tariffs than earlier anticipated and fiscal stimulus. However, it warned that fiscal strains and geopolitical uncertainty has kept financial markets volatile and could be a potential risk going forward.

On domestic front, RBI mentioned that FY26 growth is likely to be 7.4% YoY (FY25: 6.5%) according to Government’s First Advance Estimates (FAE) and growth this year was supported by strong private consumption and fixed investments. GDP growth rate for Q1 and Q2FY27 was raised by 20bps each compared to December policy review. This optimism is based on steps taken by both the Government and the RBI such as GST rationalisation and monetary easing. Furthermore, trade pacts with several countries especially that with EU and US bode well from external demand perspective and could provide fillip to growth going forward. However, the RBI cautioned that still uncertain global trade environment and volatility in financial and commodity markets pose risks to growth outlook. Since the new GDP series is scheduled to be released from this month onwards, the RBI mentioned that the full year growth projections for FY27 will now be available in April policy review using the new GDP series.

On Inflation: The RBI indicated that overall inflation remains benign with food group in continued deflation mode and subdued core inflation despite flare up in precious metals prices. Going forward, healthy kharif production and prospects of favourable rabi production bode well for food inflation and ex of precious metals, core inflation is also likely to remain range bound. However, RBI noted that CPI inflation trajectory will be subject to unfavourable base effect in Q4FY26 which may lead to uptick in YoY inflation even if underlying momentum remains muted. Consequently, headline inflation for Q4FY26 is now projected at 3.2% (2.9% earlier) with FY26 average inflation now projected at 2.1% (2% earlier).

CPI inflation for Q1 and Q2FY27 was raised by 10 and 20bps to 4% and 4.2% respectively. Since the new CPI series is scheduled to be released from this month’s onwards, the RBI mentioned that the full year CPI projections for FY27 will now be available in April policy review using the new CPI series

Conclusion and Outlook

The RBI’s decision to keep the policy rate and stance unchanged was on expected lines. Though RBI has indicated that it will remain data dependent from hereon, the upgrade in forecast for both inflation and growth suggests that the RBI is likely to go on a long pause. The RBI’s assurance that it will ‘remain proactive in liquidity management and ensure sufficient liquidity in the banking system to meet the productive requirements of the economy and to facilitate monetary policy transmission’ bodes well from yields perspective, especially at the short end

In our view, medium term outlook on Indian fixed income market remains favorable, considering:

• Government commitment to fiscal consolidation path in recent budget
• Benign inflation outlook which is likely to persist and average near RBI’s target of 4% in H1FY27
• Liquidity is likely to be in ample surplus in the coming few months in view of constant assurance by RBI governor to maintain sufficient surplus to meet the real economy needs.
• Key trade deals especially with US and EU likely to improve sentiments and lead to higher capital inflows
• Higher than budgeted flows from small savings schemes can lead to lower borrowing calendar than expected

Key Risks to the Favourable Outlook:

• Weather related uncertainty leads to rise in food prices
• Growth surprises on the upside especially after trade deals with the US and EU
• Flare up in geopolitical tensions leads to further rise in commodity prices

Overall, in our view, post fiscal year end, yields on the shorter end are likely to have a downward bias as RBI ensures sufficient liquidity, inflation remains close to target and Government expenditure at the end of the fiscal year augments liquidity. Also, after the recent rise in money market rates, medium term CD / bond yields are trading at attractive spreads over the policy repo rate/Gsec. Hence, investment in to 1-4 years duration category schemes appears to be a good investment opportunity.

DISCLAIMER

The views of HDFC Asset Management Company Limited, Investment Manager for HDFC Mutual Fund expressed herein as of February 06, 2026 are based on internal data, publicly available information and other sources believed to be reliable. The source for this document is the Bi-monthly Monetary Policy Statement, 2024-25, dated February 06, 2026 published by the RBI. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only and is not investment advice. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. HDFC Mutual Fund/HDFC AMC is not guaranteeing/ offering/communicating any indicative yields or guaranteed returns on investments made in the scheme(s). Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accept any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.