The Reserve Bank of India (RBI) is gearing up for its next Monetary Policy Committee (MPC) meeting, set to begin Wednesday. Expectations are firmly building around a pause in rate action.
After an aggressive easing cycle that has already seen the repo rate cut by 125 basis points since February 2025 to 5.25 per cent, economists believe the central bank may now opt to hold fire, at least for the moment.
Instead of another rate reduction, the focus could shift to liquidity management, bond market stability and managing currency pressures, as policymakers balance growth support with macroeconomic risks.
A Pause After December’s Cut?
The MPC had delivered a rate cut in December 2025, but analysts widely expect the committee to refrain from further easing in its February meeting. The meeting will conclude on Friday when Governor Sanjay Malhotra will reveal the final decision of the Monetary Policy Committee (MPC) on key rates and set the tone for the upcoming 2026-27 fiscal year (FY27).
“With the government remaining on course its fiscal consolidation path, we don’t expect any material impact on the direction of monetary policy,” said Radhika Rao, Executive Director and Senior Economist at DBS Bank.
The broader macro backdrop appears relatively stable. Growth momentum has remained firm despite global trade tensions, while inflation has moved off recent lows. At the same time, the rupee has been under sustained pressure, slipping to successive fresh lows, and deposit mobilisation continues to be a challenge for banks, reported IANS.
Taken together, these factors suggest the central bank may prefer a tactical pause rather than risk exacerbating currency weakness or triggering additional portfolio outflows.
Budget 2026: Stability Over Stimulus
The recently presented Union Budget 2026 has reinforced expectations of policy continuity. Fiscal consolidation remains on track, with the Centre’s debt-to-GDP ratio projected to decline by around 0.5 per cent and the fiscal deficit expected to narrow to 4.3 per cent of GDP.
Effective revenue and primary deficits are also expected to consolidate further. According to Rao, this fiscal prudence supports macroeconomic stability and reduces the urgency for aggressive monetary easing.
However, the FY27 Budget also outlines record-high borrowing requirements. In such an environment, the RBI may prioritise nimble money market operations to keep borrowing costs under control.
“We expect bond purchases to continue this quarter and in April-June 2026. With the FY27 Budget outlining a record high of borrowings, the central bank might prefer to be agile and nimble its money market related operations and keep borrowing costs in check,” said Rao.
Liquidity Takes Centre Stage
In recent weeks, the RBI has already announced a series of liquidity-enhancing measures worth more than Rs 2 lakh crore to ease pressure in the banking system. The central bank plans to deploy a mix of open market bond purchases, a foreign exchange swap and variable rate repo operations following its review of liquidity and financial conditions.
These steps come on top of earlier measures. According to SBI Research, the RBI has cut the repo rate by 125 basis points and proactively injected or announced Rs 6.6 lakh crore in liquidity during the current fiscal via open market operations (OMO).
Yet bond yields have remained stubbornly elevated.
“We propose that RBI does OMO in papers that are liquid to make a meaningful impact on yields. For example, the current 10 year paper is 6.48 per cent 2035. The RBI can do OMO in just the preceding 10 year paper, that is 6.33 per cent 2035/immediate outgoing benchmark paper,” SBI Research said.
The report argued that the current liquidity management approach has led to asymmetric transmission across market segments, limiting the downward movement in yields.
Currency Pressures and Capital Flows
Another factor likely influencing the MPC’s stance is the rupee’s continued depreciation. Further rate cuts could potentially spur repatriation of rate-sensitive portfolio flows, adding pressure on the currency.
With global financial conditions still volatile and trade tensions lingering, policymakers may prefer to conserve monetary space. A pause would allow the RBI to assess how previous rate cuts and liquidity injections are transmitting through the economy before committing to further easing.
What to Watch in the Policy Statement
While a rate hold appears the base case, markets will closely watch the RBI’s commentary on liquidity management strategy for the next quarter, bond purchase plans amid record borrowing, assessment of inflation trajectory, and signals on currency management and capital flows.
The tone of the statement may prove more important than the rate decision itself.
After front-loading rate cuts and liquidity measures, the RBI appears poised to adopt a wait-and-watch approach in February. Growth remains resilient, fiscal consolidation is on track and inflation is contained, but currency pressures, deposit challenges and heavy government borrowing complicate the policy calculus.
