RBI Holds Policy Rates Unchanged, Focuses on Growth and Stability
The Reserve Bank of India (RBI) has decided to maintain the status quo on policy interest rates during its February 2026 Monetary Policy Committee meeting. This decision follows a cumulative rate cut of 125 basis points in 2025, reflecting a cautious approach amid evolving economic conditions. The central bank's stance is bolstered by India's strengthening growth prospects and a continuation of manageable inflation levels.
Growth Outlook Brightens with US Trade Deal
India's macroeconomic indicators are showing robust momentum, with advance estimates projecting a GDP growth of 7.4% for FY26. A significant boost is expected from the recent India-US trade deal, which is set to lower tariffs and provide relief to exporters. Previously, Indian non-petroleum goods exports to the US contracted by 2.2% from September to November 2025, after higher tariffs took effect in September. Key sectors such as gems and jewellery, ready-made garments, textiles, and chemicals were particularly impacted.
While export growth moderated to 3.5% during this period from 7.3% in April to August 2025, the trade deal is anticipated to reverse this trend. Exports to the US account for approximately 20% of India's total exports, making this development crucial for economic recovery. Preliminary analysis suggests that the reduced tariffs could add around 0.2 percentage points to GDP growth, raising projections to 7.2% for FY27. The RBI has also revised its first-half growth forecast upward by 20 basis points, indicating increased optimism.
Inflation Remains Comfortable, but Monitoring Continues
Inflation in India remains under control, with estimates around 3.2% for the fourth quarter of FY26. Core inflation, excluding the impact of gold prices, stands at a low 2.6% as of December 2025. Assuming normal weather conditions, inflation is expected to remain comfortable at around 4% in FY27. However, the central bank will closely assess the impact of the new Consumer Price Index (CPI) series on future projections.
Liquidity and Bond Yields Under Scrutiny
Despite the RBI's liquidity-supporting measures, average banking system liquidity has decreased to Rs 0.7 trillion in the last two months, compared to an average of Rs 2 trillion from April to November 2025. This tightness is partly attributed to the RBI's foreign exchange interventions. With the US trade deal likely to support the Indian rupee, the need for such interventions may diminish going forward.
Government securities (Gsec) yields have risen by 45 basis points over the past eight months, despite policy rate cuts. This has widened the spread between the 10-year bond yield and the repo rate to 150 basis points. Pressure on yields stems from the central government's large gross borrowing requirement for FY27, compounded by high state-government borrowings. The spread on 10-year state government bonds over Gsec has increased to 70 basis points from 35 basis points at the start of the fiscal year. To address this, the RBI may consider open market operation (OMO) purchases to balance demand and supply in the bond market.
Future Policy Directions and Global Uncertainties
Looking ahead, the RBI is expected to maintain the status quo on policy rates, focusing on sustaining a comfortable liquidity environment and supporting government bond yields. The global economic landscape remains uncertain and volatile, prompting the central bank to preserve its policy ammunition for potential future use. With credit demand showing signs of improvement, the RBI's strategy will prioritize stability and growth facilitation.
The analysis highlights the RBI's prudent approach in navigating economic challenges while leveraging positive developments like the US trade deal to bolster India's growth trajectory.
