RBI Expected to Maintain Neutral Policy Stance, Keep Repo Rate Unchanged

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is widely expected to keep the repo rate – the key policy rate – unchanged in its upcoming policy meeting scheduled from February 4 to 6. The MPC may also retain a neutral policy stance, economists said. “With the new series on CPI and GDP to be released this month, where inflation and GDP growth could be higher than the present levels, it does look like that the MPC will pause on rates,” said Madan Sabnavis, Chief Economist, Bank of Baroda. In its December monetary policy, the six-member Monetary Policy Committee reduced the repo rate by 25 basis points (bps) to 5.25 per cent, bringing the cumulative cuts in 2025 to 125 basis points (bps). “The RBI cut the policy rate in December, when the MPC preferred to provide more weightage to inflation being below the lower bound of the Flexible Inflation Targeting (FIT) framework. With inflation likely to move higher (even in the new base year series to be published starting February 12), there is little reason for moving in with further cuts,” Yes Bank said in a recent report. “We think we have seen the last of the rate cuts in this cycle and should expect a long pause (difficult to determine the length of the pause), unless growth tends to underperform (not our base case),” the report said. Economists also expect the MPC to maintain its “neutral” stance in the forthcoming policy. According to Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank, the RBI’s focus will be on liquidity infusion, as system liquidity continues to remain low, with government cash surplus remaining high and the drain from forex intervention persisting. Liquidity conditions in the banking system have remained constrained over the past few months, limiting the effectiveness of monetary easing. Banking sector liquidity, measured as a percentage of Net Demand and Time Liabilities (NDTL), has stayed below one per cent for the last five months, and came in at a particularly tight ~0.2 per cent in January. “There will be a greater focus on liquidity management with an open market operation (OMO) calendar being announced and possibly a cash reserve ratio (CRR) cut invoked to infuse permanent liquidity,” said Sabnavis. A Nuvama Research report said that the trade deal between the US and India would help support foreign flows and the rupee, which gives the RBI leeway to manage domestic liquidity. Will RBI revise the GDP and inflation targets? Economists believe the RBI is unlikely to change its forecasts for growth and inflation. In December policy, RBI sharply raised its gross domestic product (GDP) projection for FY26 by 50 bps to 7.3 per cent from 6.8 per cent. The country’s real GDP is estimated to grow at 7.4 per cent in FY26, according to the government’s first advance estimates of the number. In its previous policy, the RBI lowered its consumer price index (CPI) inflation projection for 2025-26 to 2 per cent from 2.6 per cent. What happens to lending rates if the repo rate is unchanged? If the RBI maintains status quo, interest rates on loans and deposits are likely to remain unchanged as of now. All external benchmark lending rates (EBLR) linked to the repo rate will not rise. However, lenders may revise their interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR).