Policy Rate Unchanged
The Reserve Bank of India's Monetary Policy Committee (MPC), in its recent 59th meeting concluding on February 6th for the fiscal year 2025-26, made a unanimous
decision to hold the policy repo rate steady at 5.25%. This aligns with prevailing market expectations and marks the last policy announcement for FY26. Consequently, the standing deposit facility (SDF) rate remains at 5.00%, and the marginal standing facility (MSF) along with the bank rate are also held at 5.50%. The committee opted to maintain its "neutral stance" on monetary policy, with a single dissenting vote from Prof. Ram Singh, who advocated for an "accommodative" stance. This decision reflects a cautious approach, balancing growth imperatives with price stability considerations within the Indian economic landscape.
Robust Growth Outlook
India's economic trajectory appears strong, with the first advance estimates projecting a real GDP growth of 7.4% for FY26. This anticipated expansion is primarily fueled by robust private consumption and significant fixed investment activity. The services sector continues to show dynamism, agriculture remains resilient despite challenges, and manufacturing is exhibiting signs of revival. Looking ahead, the RBI forecasts this growth momentum to persist into the first half of FY27, projecting real GDP growth at 6.90% for Q1FY27 and 7.0% for Q2FY27. These figures represent a slight upward revision from previous forecasts of 6.70% and 6.80% respectively, with the risks to growth being evenly balanced. This optimistic outlook is further bolstered by potential landmark trade agreements, such as with the European Union and a prospective trade deal with the US, which could significantly boost exports.
Inflation Dynamics
Inflationary pressures in India have remained subdued, with headline Consumer Price Index (CPI) inflation recorded at a low 0.7% in November 2025 and 1.3% in December 2025, well within the RBI's tolerance band of 2–6%. Core inflation, even after accounting for increased metal prices, has also stayed benign. Specifically, core inflation excluding the impact of gold stands at approximately 2.60% as of December 2025. While risks to inflation persist, primarily stemming from volatility in energy prices and the impacts of climate change, the overall picture is one of price stability. The RBI forecasts headline inflation for FY26 at 2.10%, an upward revision from the previous 2.0% estimate. For Q4FY26, the forecast is now 3.20% (up from 2.90%), with Q1FY27 and Q2FY27 projected at 4.0% and 4.2% respectively, also slightly higher than prior estimates. Despite these minor upward revisions, inflation remains generally well-managed, with the impact of precious metal prices being offset by broader benign conditions, and risks to the inflation outlook are considered evenly balanced.
Liquidity Management Strategy
The Reserve Bank of India has actively engaged in managing liquidity within the banking system to facilitate monetary policy transmission. Proactive measures have included open market operations (OMO) purchases totaling Rs 4.5 lakh crore and forex buy/sell swaps amounting to $25.10 billion between December 2025 and February 5, 2026. Further liquidity infusion has been undertaken through 90-day Variable Rate Reverse Repo (VRR) auctions, with a Rs 25,000 crore auction followed by another of Rs 1.10 lakh crore in January and February 2026. These actions are aimed at ensuring sufficient funds are available in the system. The weighted average lending rate of scheduled commercial banks has seen a reduction of 105 basis points for fresh rupee loans from February 2025 to December 2025, following cumulative rate cuts of 125 basis points in the current cycle. Similarly, the weighted average deposit term rate on fresh deposits has decreased by 95 basis points. While transmission in the debt capital market has been more muted, the RBI acknowledges recent tightness in liquidity, increased supply, and seasonal factors contributing to a spike in money market rates. The central bank remains committed to maintaining adequate liquidity to ensure effective transmission of its policy rates.
Future Outlook and Rates
With the policy repo rate maintained at 5.25% and the committee opting for a "neutral stance," the expectation is that interest rates will remain on hold throughout the fiscal year 2026-27. This "long pause" is supported by the resilience of India's GDP growth, positive implications from international trade deals, and inflation likely settling within the RBI's target range. Furthermore, the RBI's consistent efforts to manage liquidity are anticipated to exert downward pressure on short-term interest rates, potentially leading to a steeper yield curve. In this environment, the 10-year Government Securities (G-Sec) yield is projected to trade within the range of 6.60-6.80% in the near to medium term, reflecting a stable and predictable monetary policy framework.
