RBI holds repo rate steady: Key highlights and implications

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Picture Courtesy: Indian Express

Context:

The Monetary Policy Committee (MPC) of the Reserve Bank of India decided to keep the repo rate unchanged at 5.25% and retain a neutral stance in February 2026.

Key highlights of RBI Monetary Policy Committee:

• Policy rate kept unchanged: The Monetary Policy Committee decided to keep the repo rate unchanged at 5.25%, continuing the pause after the previous round of monetary easing, thereby ensuring stability in the interest rate environment for borrowers, lenders, and financial markets.
• Neutral stance signals flexibility: Along with maintaining the policy rate, the MPC retained its neutral stance, which indicates that the central bank is keeping its options open and will adjust policy in either direction depending on the evolving trends in inflation, growth, and global conditions.
• Growth outlook revised upward: Reflecting confidence in the domestic economy, the RBI revised its GDP growth projection for FY26 upward to 7.4%, as strong consumption demand, fiscal support from the Union Budget, and the cumulative impact of earlier rate cuts continue to support economic momentum.
• Inflation remains under control: At the same time, the RBI marginally increased its CPI inflation forecast to 2.1% for FY26, noting that inflation remains well within the target band, with the slight upward revision largely due to higher precious metal prices while underlying inflation pressures remain subdued.
• Domestic economy shows resilience: The MPC observed that domestic economic activity remains robust, supported by rising consumption, tax relief measures, GST rationalisation, low inflation, and the government’s continued adherence to the fiscal consolidation path.
• External developments provide support but pose risks: On the external front, the RBI noted that recent trade agreements with the United States, the European Union, Oman, and New Zealand are expected to boost exports and investment, although global uncertainties such as geopolitical tensions, volatile crude oil prices, and divergent global monetary policies continue to warrant a cautious approach.
• Lending and deposit rates likely to remain stable: Given the unchanged policy rate, repo-linked loan EMIs are expected to remain stable in the near term, although banks may still adjust MCLR-based lending and deposit rates depending on their funding costs and liquidity conditions.

Implications of RBI’s status quo policy:

Pros of maintaining the status quo

• Macroeconomic stability supported by low inflation: The decision to hold the repo rate at 5.25% is anchored in a comfortable inflation environment, as CPI inflation for FY26 is projected at 2.1%, well within the RBI’s 2–6% target band and close to the 4% medium-term objective. With food prices remaining soft and core inflation subdued, maintaining the current rate helps preserve price stability without the need for immediate policy tightening.
• Allows growth momentum to sustain: At the same time, India’s economic outlook remains strong, with GDP growth projected at 7.4% for FY26, making it one of the fastest-growing major economies. Since the RBI had already delivered a cumulative 125 basis points rate cut during 2025, keeping rates unchanged allows the earlier monetary easing to continue supporting consumption, investment, and overall economic activity.
• Provides financial certainty to borrowers: By maintaining the policy rate, the RBI ensures that repo-linked loan rates and EMIs remain unchanged, thereby offering stability to households and businesses. For instance, a home loan borrower servicing a monthly EMI of ₹30,000 will not face any immediate increase in repayment burden, which helps sustain consumer confidence and housing demand.
• Supports investment amid positive external developments: The stable interest rate environment also complements recent trade agreements with the US and the European Union, which are expected to boost exports and attract investment in sectors such as manufacturing, pharmaceuticals, and electronics. Policy continuity, in this context, enables firms to plan expansion with greater certainty.
• Maintains policy flexibility in a volatile global environment: Furthermore, by retaining a neutral stance, the RBI has preserved the flexibility to respond quickly to changing conditions, whether in the form of rising inflation or slowing growth, thereby strengthening its data-dependent approach to monetary management.

Cons of Maintaining the Status Quo

• Limited additional stimulus for investment and credit growth: Despite strong headline growth, some sectors continue to face high borrowing costs, particularly MSMEs, real estate, and infrastructure, which are sensitive to interest rate movements. In such cases, a further rate cut could have accelerated credit demand and private investment.

• Positive real interest rates may constrain borrowing: With inflation projected around 2–3% and the repo rate at 5.25%, real interest rates remain significantly positive, which may discourage aggressive borrowing and risk-taking by businesses, especially in a still-recovering private investment cycle.

• Vulnerability to external price shocks: The current comfort on inflation could also prove temporary, as India imports nearly 85% of its crude oil requirements, making it vulnerable to global price volatility. Any sharp rise in oil prices due to geopolitical tensions could quickly raise inflation and force the RBI into reactive policy tightening.

• Uneven transmission across borrowers: Although repo-linked loans remain stable, borrowers with MCLR-based loans may still face rate adjustments if banks experience higher funding costs or tighter liquidity conditions, thereby limiting the uniformity of the policy’s benefits.
• Risks from global monetary divergence: Finally, if advanced economies maintain higher interest rates for longer, the narrowing interest rate differential could trigger capital outflows and exchange rate pressures, complicating domestic monetary management.

Policy priorities after the rate pause:

• Adopt a data-driven policy approach: With the repo rate held at 5.25%, the RBI should continue its data-dependent strategy, closely tracking trends in inflation, growth, liquidity, and global financial conditions so that timely action can be taken if macroeconomic risks emerge.
• Ensure effective transmission of past rate cuts: Since the RBI reduced policy rates by 125 basis points during 2025, the immediate priority should be to ensure full transmission to lending and deposit rates, particularly for sectors such as MSMEs, housing, and infrastructure where credit costs remain relatively high.
• Remain vigilant on inflation risks: Although inflation is currently benign (projected around 2.1% for FY26), the RBI must remain alert to upside risks arising from crude oil price volatility, geopolitical tensions, exchange rate pressures, or supply-side shocks, and be prepared to tighten policy if price stability is threatened.
• Support growth without creating financial imbalances: With GDP growth projected at 7.4%, monetary policy should maintain a supportive environment for consumption and investment while simultaneously monitoring risks such as excessive credit growth, asset price bubbles, and rising unsecured lending.
• Strengthen external sector resilience: In a context of global monetary divergence and uncertain capital flows, the RBI should continue to manage exchange rate volatility, maintain adequate forex reserves, and ensure orderly liquidity conditions to protect macroeconomic stability
• Improve Coordination with Fiscal Policy: The effectiveness of the policy pause will depend on continued fiscal discipline and growth-oriented public spending, as coordinated fiscal and monetary actions can sustain demand without creating inflationary pressures.

Conclusion:

The decision of the Reserve Bank of India to keep the repo rate unchanged reflects a calibrated approach amid low inflation, strong growth prospects, and global uncertainty. Going forward, the focus will be on ensuring effective policy transmission, managing external and inflation risks, and maintaining flexibility to support sustainable and stable economic growth.

Source: Indian Express