RBI Maintains Status Quo on Repo Rate at 5.25%
In a widely anticipated move, the Reserve Bank of India's Monetary Policy Committee has unanimously decided to keep the key policy repo rate unchanged at 5.25%. This decision follows a series of rate cuts in 2025, totaling 125 basis points, and marks a shift towards a steady monetary policy stance for the foreseeable future.
Revised Economic Projections Signal Optimism
The central bank has upgraded its growth forecast for the fiscal year 2026, raising the gross domestic product estimate to 7.4% from the previous 7.3%. Additionally, the consumer price index inflation projection has been adjusted upward to 2.1% from 2%. RBI Governor Sanjay Malhotra highlighted that the Indian economy continues to exhibit robust growth despite global challenges, with benign inflation allowing for a growth-supportive approach while ensuring financial stability.
Policy Stance and Future Outlook
The MPC, by a 5:1 majority, voted to maintain a 'neutral' policy stance, with one external member advocating for an accommodative shift. Governor Malhotra indicated that the current repo rate of 5.25% is likely to remain steady over the next 9-12 months, suggesting a prolonged pause. He emphasized that with inflation remaining low, policy rates will stay at reduced levels for an extended period, though further reductions will depend on future MPC assessments.
Growth Momentum and External Factors
High-frequency indicators point to sustained strong growth in the third quarter of FY26 and beyond. Positive developments, such as landmark trade agreements with the EU and potential US deals, are expected to bolster this momentum. Urban consumption is recovering, supported by GST rationalization and previous monetary easing, while rural demand remains steady. However, risks from geopolitical tensions, financial market volatility, and adverse weather events could threaten the growth outlook.
Inflation Trends and Risks
Headline inflation has stayed below the RBI's tolerance band, with CPI rising to 1.33% in December from 0.71% in November. Favorable factors like healthy kharif production and adequate buffer stocks brighten the near-term food supply outlook. Yet, the central bank has revised its FY26 CPI inflation estimate to 2.1%, with Q4 projected at 3.2%, up from 2.9%, due to base effects and potential upside risks from energy price volatility and geopolitical uncertainties.
Implications for Borrowers and Economy
The unchanged repo rate means that equated monthly installments for home, vehicle, and other loans are unlikely to change, providing relief to borrowers. Economists from HSBC noted that after a period of rate cuts, the RBI has pivoted to maintaining steady policy rates, reflecting confidence in the economy's resilience. The bank has deferred its FY27 GDP projection to the April policy review, awaiting data from the new GDP series to guide future monetary decisions.
