What Happened
- A major global brokerage has dropped its expectation for a rate cut by the Reserve Bank of India in April 2026, citing firmer inflation and ongoing "stealth easing" in money markets.
- The weighted average call rate has been trading near 5%, the floor of the RBI's Liquidity Adjustment Facility (LAF) corridor, effectively signalling that monetary conditions have already loosened without an explicit rate reduction.
- India's consumer price inflation projections for FY2026-27 have been revised upward to 4.1% (from 3.9%) following the release of CPI data under a new series with revised weightings.
- Despite the RBI holding the repo rate steady at 5.25% in its February 2026 meeting, market-level interest rates suggest de facto easing has already taken place.
Static Topic Bridges
RBI's Monetary Policy Corridor (LAF Framework)
The RBI manages short-term liquidity through the Liquidity Adjustment Facility (LAF), which operates as a corridor system. The policy repo rate sits at the centre, while the Marginal Standing Facility (MSF) rate forms the ceiling (25 basis points above repo) and the Standing Deposit Facility (SDF) rate forms the floor (25 basis points below repo). The SDF replaced the fixed reverse repo rate as the LAF floor in April 2022. When the call rate drifts toward the SDF floor, it indicates surplus liquidity in the banking system, meaning banks have more funds than they need and are parking excess money with the RBI at the lower rate.
- Repo rate (current): 5.25%; SDF rate: 5.00%; MSF rate: 5.50%
- SDF was introduced in April 2022 to replace reverse repo as floor of the corridor; it requires no collateral from banks
- The Monetary Policy Committee (MPC), constituted under Section 45ZB of the RBI Act (inserted via Finance Act 2016), has six members: three from RBI (including Governor as chair) and three external members appointed by the Government
- Decisions require a majority vote; the Governor has a casting vote in case of a tie
Connection to this news: The call rate hovering at 5% (the SDF floor) suggests that surplus liquidity has effectively pushed market rates down to the lowest possible level within the corridor, achieving monetary easing without a formal repo rate cut -- what analysts term "stealth easing."
Inflation Targeting Framework in India
India adopted a flexible inflation targeting (FIT) framework in 2016, based on the recommendations of the Urjit Patel Committee (2014). Under this framework, the RBI is mandated to maintain CPI inflation at 4% with a tolerance band of +/- 2% (i.e., 2-6%). If inflation stays outside this range for three consecutive quarters, the RBI must provide a written explanation to the Government. The framework was operationalised through an amendment to the RBI Act (Section 45ZA) via the Finance Act, 2016.
- Target: 4% CPI inflation; band: 2-6%
- Urjit Patel Committee (2014) recommended CPI as the nominal anchor (replacing WPI-based assessment)
- Monetary Policy Framework Agreement signed between Government and RBI in February 2015
- RBI Act Section 45ZA provides statutory basis; Section 45ZB establishes the MPC
- CPI-Combined (Urban + Rural) is compiled by the National Statistical Office (NSO) under MoSPI
- New CPI series released in 2026 with revised weightings for food and housing, changing the base year from 2012 to 2024
Connection to this news: The revision of CPI weightings under the new series has pushed inflation projections higher to 4.1%, closer to the RBI's 4% target, weakening the case for further rate reductions and supporting the expected pause.
Open Market Operations (OMOs) and Liquidity Management Tools
Beyond the repo rate, the RBI uses several instruments for liquidity management: Open Market Operations (buying/selling government securities to inject/absorb liquidity), Variable Rate Repo/Reverse Repo auctions, and the Market Stabilisation Scheme (MSS). OMO purchases inject durable liquidity into the system, while sales absorb it. The RBI also uses forex swaps and long-term repo operations (LTROs) as supplementary tools.
- OMO purchases by the RBI increase the monetary base by injecting permanent liquidity
- Variable Rate Repo (VRR) auctions provide short-term liquidity at rates determined by market bidding
- Long-Term Repo Operations (LTROs) were introduced in February 2020 to inject durable liquidity at the repo rate for 1-3 year tenors
- The RBI's liquidity management objective is to keep the operating target (weighted average call rate) close to the repo rate
Connection to this news: The RBI's active use of liquidity injection tools -- including OMOs and VRR auctions -- has pushed the call rate to the SDF floor, achieving the economic impact of a rate cut without formally reducing the repo rate, which is the essence of the "stealth easing" phenomenon observed by analysts.
Key Facts & Data
- Current repo rate: 5.25% (held steady at February 2026 MPC meeting)
- SDF rate: 5.00%; MSF rate: 5.50%
- Call rate trading near: 5.00% (the LAF corridor floor)
- Inflation projection revised to: 4.1% for FY2026-27 (up from 3.9% under old CPI series)
- CPI inflation target: 4% with +/- 2% band (2-6%)
- New CPI base year: 2024 (replacing 2012 base year)
- MPC composition: 6 members (3 RBI + 3 external)
- One-year forward inflation expected to stay below 4%, limiting the need for rate hikes