Policy Crossroads Today
The Reserve Bank of India's Monetary Policy Committee (MPC) convenes for its final meeting of FY26, with a significant policy announcement due. Following
a period of successive rate cuts, the financial markets are keenly observing whether the central bank will opt for another reduction in the key repo rate or decide to hold steady, allowing for a re-evaluation of the prevailing macroeconomic environment. This policy review arrives at a pivotal moment, shortly after the Union Budget for FY27 revealed a substantial 12% increase in capital expenditure and set a fiscal deficit target of 4.3%. Concurrently, the international arena shows signs of improvement, exemplified by a reduction in US tariffs on Indian goods to 18% and the recent signing of an India-EU Free Trade Agreement, which is anticipated to bolster trade volumes and capital flows into the country.
A History of Easing
Over the preceding year, the MPC has orchestrated a series of four interest rate adjustments. The easing cycle commenced in February 2025 with a modest 0.25% reduction, followed by an equivalent cut in April. A more significant easing of 0.5% was implemented in June. After periods of holding steady in August and October, the committee enacted another 0.25% decrease in the repo rate in December. With these cumulative reductions, many economic experts suggest that the RBI's capacity for further rate cuts has become more limited. The prevailing sentiment among analysts leans towards this upcoming meeting being less about altering the repo rate and more about the RBI's strategic approach to managing liquidity, bond yields, and overall financial conditions, especially as the government gears up for a substantial borrowing program of ₹17.2 trillion in FY27.
Inflation vs. Growth
Sujan Hajra from Anand Rathi Group posits that while economic growth is receiving a boost from public sector spending and positive trade trends, the persistence of inflation makes further monetary easing a complex proposition at this juncture. He elaborates that with projected moderate GDP growth, supported by ongoing public sector capital expenditure and the positive impact of two major trade pacts, the considerations for monetary policy are delicately balanced. Hajra also points out that a controlled increase in retail inflation diminishes the immediate need for further interest rate reductions. Consequently, the central bank's attention is likely to pivot towards ensuring the stability of the bond market and maintaining orderly liquidity conditions, rather than making adjustments to the policy rate or its overall stance. This perspective suggests a strategic shift in priorities.
Global Backdrop Aids Stability
Emkay echoes this sentiment, highlighting that a somewhat calmer global economic climate, partly due to the resolution of trade issues between the US and India, is expected to provide support to the current account balance, foreign portfolio investments, and the Indian Rupee. The brokerage firm notes that despite fluctuations in global macroeconomic narratives and market sentiment, the February 2026 MPC faces a more favorable external environment. This improved outlook is attributed to the US-India trade resolution, which should contribute to stabilizing the current account. However, Emkay cautions that inflation might see an upward trend as the beneficial effects of low base effects begin to dissipate. They also draw attention to the sluggish transmission of monetary policy, despite significant easing and persistent liquidity injections. Emkay forecasts that system liquidity will significantly increase to approximately Rs2.4 trillion by the end of March FY26, from around Rs200 billion at the close of December FY25, thereby reducing the necessity for additional support from the RBI.
Focus on Liquidity Tools
From a global banking viewpoint, Wells Fargo anticipates that the RBI will firmly maintain its current interest rates. Their expectation is that the central bank will redirect its efforts towards utilizing liquidity management tools and overseeing yield movements. Santanu Sengupta of Wells Fargo suggests that after implementing a cumulative easing of 125 basis points, the Reserve Bank is unlikely to rush into further rate reductions. Instead, the RBI might strategically employ measures such as open market operations, variable rate repos, and targeted liquidity interventions to ensure the smooth functioning of the government securities market amidst substantial borrowing requirements. Furthermore, he anticipates that the RBI will continue to manage currency fluctuations through carefully calibrated foreign exchange operations and swaps, without aiming to target any specific exchange rate for the rupee. In essence, the combination of the Union Budget's borrowing needs, an improving trade scenario, firming inflation indicators, and already abundant liquidity levels points towards February 6 not being the day for another repo rate cut.
