Key Takeaways
- You may be over‑leveraged if you assume another rate cut in February.
- The February 6 announcement is likely to keep the repo rate at 5.25%.
- Liquidity will surge to >₹2.4 trillion by March FY26, reshaping bond market dynamics.
- Budget‑driven borrowing of ₹17.2 trillion and new trade deals tilt the risk‑reward balance.
- Investors should prioritize short‑duration debt, selective equities, and FX hedges.
The Hook: You’ve been betting on another RBI rate cut—time to rethink that gamble.
The Reserve Bank of India’s Monetary Policy Committee convenes its final FY26 meeting on February 6, a date that could redraw the risk map for every Indian‑focused portfolio. After four cuts totalling 125 basis points, the central bank sits at a repo rate of 5.25%. The big question now isn’t “if” the RBI will cut again, but “why” it might hold steady and what that means for liquidity, bond yields, and the massive borrowing programme that the Union Budget just unveiled.
Why the RBI Might Hold the Repo Rate at 5.25%
Two forces are converging to pressure the RBI into a pause. First, the cumulative easing has already squeezed the policy‑rate lever. A 0.25% cut now would bring the repo to 5.00%, a level that historically sparked a surge in credit growth and, subsequently, inflationary pressures. Second, the latest fiscal blueprint earmarks a historic ₹17.2 trillion of government borrowing for FY27. With such a demand for funding, the central bank faces a classic “liquidity‑absorption vs. rate‑cut” dilemma. Holding the repo allows the RBI to manage the supply of government securities through open‑market operations rather than relying on blunt‑instrument rate moves.
How the 2026 Budget and Trade Deals Shape RBI’s Liquidity Toolkit
The budget’s 12% jump in capital expenditure injects a robust growth catalyst, but it also magnifies the government’s financing needs. The RBI, therefore, is expected to lean on targeted liquidity measures—variable‑rate repos, reverse repos, and gilt‑linked swaps—to keep the yield curve orderly. At the same time, the United States’ decision to lower tariffs to 18% and the newly signed India–EU Free Trade Agreement create a more favourable external environment. Stronger export prospects bolster the current account, supporting rupee stability and reducing the need for aggressive foreign‑exchange interventions.
Sector‑Wide Implications: Bonds, Equities, and the FX Market
Bond market: Systemic liquidity is projected to climb from roughly ₹200 billion at the end of December FY25 to over ₹2.4 trillion by the close of March FY26. That ten‑fold jump will compress short‑term yields, compressing the spread between 10‑year government bonds and the repo rate. Investors should favour high‑quality, short‑duration paper that can benefit from the anticipated yield compression without bearing the price volatility of longer‑dated issues.
Equity market: Sectors tied to public‑sector capex—construction, cement, steel, and infrastructure—stand to gain from the budget’s spending push. However, a steady repo rate removes the cheap‑money tailwind that often fuels speculative equity rallies. Expect a more disciplined earnings‑driven rally, with value‑oriented stocks outperforming high‑multiple growth names.
FX market: The RBI is likely to continue calibrated forex swaps to smooth rupee volatility rather than targeting a specific exchange‑rate band. The improved US‑India trade backdrop should support a modest rupee appreciation, benefitting import‑heavy corporates while pressuring exporters. Hedging strategies will become more important for investors with exposure to INR‑denominated assets.
Historical Parallel: The 2019–2020 Rate‑Cut Cycle
In late 2019, the RBI trimmed the repo rate three times in quick succession, only to pause in early 2020 as global oil price volatility and a slowing domestic economy raised inflation concerns. The subsequent pause helped the central bank avoid a premature cut that would later exacerbate the COVID‑19‑induced shock. The lesson is clear: a pause after an aggressive easing phase can preserve policy credibility and give the transmission mechanism time to work.
Investor Playbook: Bull vs. Bear Scenarios
Bull Case (Rate Cut): If inflation unexpectedly eases below the RBI’s 4% medium‑term target, the committee could surprise with a 0.25% cut. In that scenario, long‑duration bonds would rally, equity valuations could stretch, and the rupee might weaken on capital‑outflow expectations. Positioning: increase exposure to long‑dated gilt funds, high‑beta equities, and consider INR‑short hedges.
Bear Case (Rate Hold): The more probable outcome—rate hold—means liquidity will be managed via market operations. Short‑duration debt will outperform as yields compress, while value equities tied to capex will see steady earnings growth. The rupee should stay within a tight band, rewarding forex‑neutral strategies. Positioning: tilt toward short‑duration bond ETFs, select infrastructure and consumer‑durable stocks, and keep a modest cash buffer for opportunistic entry.
Regardless of the outcome, the key for investors is to respect the RBI’s new operating framework: policy rate as a “anchor,” liquidity tools as the active lever. Aligning portfolio construction with that reality will safeguard returns in a market that’s shifting from rate‑driven to liquidity‑driven dynamics.