The Nifty 50 snapped a two-day losing streak today. It closed at 25,682.75. Investors are chasing a ghost. They call it a nascent recovery. It is a technical rebound fueled by a massive cash injection from the Reserve Bank of India. The benchmark index rose 0.83 percent on February 16. This followed a brutal sell-off on Friday that erased 7.4 lakh crore in market capitalization. The volatility is not a bug. It is a feature of a market disconnected from its underlying cost of capital.
The AI Mirage in IT Services
IT majors are bleeding margins. The new labour codes are expensive. One-time charges are eating profits. TCS reported a 14 percent drop in consolidated profit due to these regulatory shifts. Infosys and HCL Tech faced similar headwinds. Yet, contrarians are buying. They see green shoots in artificial intelligence. HCL Tech reports that AI now contributes 4 percent to its revenue. TCS claims 6 percent. These are small bases for such high valuations. The sector is trading on hope rather than realized efficiency. Per recent Q3 FY26 earnings reviews, discretionary spending remains muted. The recovery is not structural. It is a stabilization of low expectations.
The Arbitrage Economy
Banks are sitting on a 5 lakh crore surplus. This is a massive cash glut. It is the highest level in six months. The Reserve Bank of India held the repo rate at 5.25 percent on February 6. They maintained a neutral stance. But the money market is telling a different story. The tri-party repo (TREPS) rate has crashed. It is trading well below the Standing Deposit Facility (SDF) rate of 5 percent. The spread widened to 34 basis points last week. Banks are not lending to businesses. They are playing a risk-free arbitrage game. They borrow cheap and park the cash with the central bank. This rent-seeking behavior undercuts the very growth the RBI aims to stimulate.
India Banking System Liquidity Surplus (February 2026)
Regulatory Tightening and Market Fallout
The regulator is watching. The RBI recently tightened lending norms for capital market intermediaries. The impact was immediate. The BSE stock plunged 7 percent today. Funding costs are rising for those who leverage the most. While the Nifty Bank index formed a bullish engulfing candle on the daily chart, the underlying health is suspect. Credit growth remains robust at 15 percent, but the loan-to-deposit ratio is stretching thin. The government plans to borrow a record 17.2 lakh crore in the next fiscal year. This will crowd out private investment. It will force yields higher. The current liquidity surplus is a temporary shield against a looming fiscal shock.
| Sector | Feb 16 Performance (%) | Key Driver |
|---|---|---|
| PSU Banks | +1.85 | RBI Liquidity Injection |
| Energy | +1.40 | Power Grid Surge |
| Pharma | +1.10 | Natco Semaglutide Approval |
| IT Services | -0.75 | Labour Code Margin Hits |
| Auto | -1.05 | Maruti Suzuki Weakness |
The Path to April
The markets are waiting for a new anchor. The mid-February release of the new GDP and CPI series with a 2024 base year will reset the valuation models. Analysts at Bloomberg News suggest this could lead to a significant re-rating of the inflation trajectory. The next major milestone is the April 2026 monetary policy meeting. Watch the 10-year benchmark bond yield. It currently sits at 6.67 percent. Any move above 6.80 percent will signal that the liquidity cushion has finally deflated. The nascent recovery in earnings must now face the reality of higher structural costs.
