RBI Maintains Status Quo on Interest Rates, Signals Cautious Optimism
The Reserve Bank of India's Monetary Policy Committee (MPC) has decided to keep the policy repo rate unchanged at 5.25%, reinforcing a neutral stance in its latest review. This decision ensures that lending and deposit rates will remain stable for the foreseeable future, providing relief to borrowers with no immediate changes in equated monthly instalments (EMIs) on home and personal loans.
Key Factors Behind the Rate Pause
Announcing the policy, RBI Governor Sanjay Malhotra highlighted that the MPC's move reflects a combination of a favourable inflation outlook, robust domestic growth momentum, and persistent external risks. The decision follows a 25 basis point rate cut in December 2025, which brought cumulative reductions to 125 basis points for the year, marking a period of sustained monetary easing.
Several factors contributed to this pause:
- Strong Economic Growth: The MPC revised the GDP growth projection upward to 7.4% from 7.3% for FY26, supported by robust consumption, which is expected to expand by about 7%. This optimism is bolstered by income tax cuts in the Union Budget, GST rate rationalisation, and subdued inflation.
- Inflation Management: Retail inflation projections were marginally raised to 2.1% from 2%, with headline inflation remaining below the tolerance band. The slight upward revision is primarily due to increased prices of precious metals, contributing 60-70 basis points, while underlying inflation stays low.
- Trade Agreements: Recent trade pacts with the US, EU, Oman, and New Zealand are anticipated to cushion global uncertainties and support medium-to-long-term growth, though geopolitical developments require close monitoring.
Impact on Borrowers and Depositors
With the repo rate held steady, loans linked to external benchmarks, especially those directly tied to the repo rate, will not see immediate changes. Borrowers with such loans can expect stable EMIs, offering certainty in repayment obligations. However, interest rates on loans based on the marginal cost of funds-based lending rate (MCLR) may still fluctuate, as banks retain flexibility to adjust based on funding costs and liquidity conditions.
On the deposit side, rates are expected to remain steady unless banks face sustained liquidity or funding pressures that prompt a reassessment of pricing strategies.
Revised Economic Projections and Outlook
The central bank has fine-tuned its economic forecasts, aligning with the government's first advance estimates that peg real GDP growth at 7.4% for FY26. Malhotra noted that underlying data indicates strong growth momentum, driven by domestic factors amidst a challenging external environment.
Inflation details: Consumer Price Index (CPI) inflation edged up from 0.71% to 1.33% in December 2025 but remains comfortably below the RBI's 2–6% target range, largely due to easing deflation in food prices. The revised outlook for CPI inflation in Q1 and Q2 of the next year stands at 4% and 4.2%, respectively, remaining benign and near the inflation target.
The Road Ahead and Global Context
The RBI adopts a wait-and-watch approach, balancing firm economic growth, controlled inflation, and fiscal support. Trade agreements with the EU and US are likely to sustain growth momentum, but risks persist from geopolitical tensions, volatile crude oil prices, and shifts in global monetary conditions.
Malhotra emphasized that while global growth is expected to be marginally stronger, supported by tech investments and accommodative financial conditions, escalating geopolitical frictions and trade tensions pose challenges. For borrowers, the current policy offers reassurance, but the central bank remains vigilant to external shocks that could threaten growth or inflation stability.
In summary, the February policy decision represents a deliberate pause aimed at preserving flexibility in an uncertain global environment, with the MPC guided by evolving macroeconomic conditions.
