The judicial probe would inquire into whether the chief minister's office and Chandy himself had a role in the "solar scam".
The clean chit came as the court disposed of a petition by activist K. Joy, seeking that CCTV visuals from Chandy's office be examined to check if one of the accused, Saritha Nair, was at his office, accompanied by Sreedharan Nair.
The businessman has claimed that he made an investment in the fraudulent enterprise led by Saritha Nair and her live-in partner Biju Radhakrishnan after Chandy asked him to invest.
"Saritha Nair might have business interests, but there is nothing to prove that Chief Minister Chandy had a role in the matter, or that he did anything wrong. There is nothing to implicate him, and there is no evidence against him," the court said, adding that there was no reason to examine the CCTV visuals.
The court also pointed out that 33 cases have been registered in connection with the solar scam, and none of those whose made the complaints have so far questioned the fairness of the state police or the conduct of its investigations.
Chandy, asked for a response to the court's observations, said: "What can I say?"
The court's observations, however, come as major reprieve for Chandy, who has been put on the defensive by an aggressive Left opposition ever since the scam broke out in June this year, with the arrest of Saritha Nair.
Sreedharan Nair, one of those defrauded in the case, complained that he had lost money he entrusted to a couple who promised him an agency to manufacture solar panels. He had asserted that he had even met the chief minister, accompanied by Saritha Nair, an accused in the case.
Two weeks after the arrest of Saritha Nair, her live-in partner Biju Radhakrishnan was also taken into custody.
The couple allegedly defrauded people by offering solar energy solutions at huge discounts, and often lured people into investing in their enterprise by citing an acquaintance with people in high office in the state government.
Chandy asked for a response to the court's observations.
When the two failed to make good promises made to clients, several cases were lodged against the couple with state police.
Telephone call records of the two accused revealed that they had been in close touch with influential people in Kerala.
While one member of Chandy's personal staff was arrested in the case and released on bail later, two others lost their jobs.
The state police have so far charged the couple with 33 cases. In some of the cases, popular TV actress Shalu Menon was also accused. Menon is out on bail.