RBI Monetary Policy Committee Expected to Hold Rates Steady in February Meeting
The Reserve Bank of India's Monetary Policy Committee is widely anticipated to maintain the policy repo rate at 5.25% during its upcoming meeting scheduled for Friday, according to a recent survey of economists. This decision would signal a continuation of the prolonged pause in the central bank's monetary easing cycle, which has seen aggressive front-loaded rate reductions over the past year.
Economists Overwhelmingly Predict Rate Pause
A comprehensive Mint poll involving ten leading economists revealed that nine experts expect the MPC to keep rates unchanged at the current level, while only one anticipates a modest 25-basis-point cut to 5.00%. The MPC, which will announce its decision following the 4-6 February meeting, is also expected to retain its neutral policy stance, providing flexibility for future adjustments in either direction as economic conditions evolve.
Gaura Sengupta, chief economist at IDFC FIRST Bank, emphasized this expectation, stating, "We expect the RBI to remain on pause in February. Inflation in FY27 is projected to average at 4%, aligning perfectly with the monetary policy target. Additionally, economic growth is demonstrating signs of becoming broad-based, with noticeable improvements in both rural and urban consumption patterns."
Liquidity Concerns Take Center Stage
While interest rates are likely to remain stable, liquidity management has emerged as the primary focus for this policy review. Systemic liquidity remains constrained despite multiple interventions, with the government's cash surplus remaining elevated and persistent drains from foreign exchange market operations. As of 2 February, banking system liquidity showed a surplus of approximately ₹1.7 trillion, yet underlying pressures persist due to the widening gap between credit and deposit growth.
Sengupta further explained, "Banks' credit-to-deposit ratios continue to hover at historical highs, creating significant pressure in money markets and leading to increased rates for certificates of deposit." This situation has prompted economists and market participants to urge the central bank to prioritize easing banking system liquidity over implementing further rate cuts.
Potential Liquidity Measures Under Consideration
The RBI is expected to continue employing open market operations and dollar buy-sell swaps to address liquidity constraints. According to Deutsche Bank's analysis, the central bank may need to conduct approximately ₹2 trillion in additional OMO purchases during the remainder of this fiscal year, with potentially another ₹4 trillion in the first quarter of FY27 to ensure stable reserve money growth.
Madan Sabnavis, chief economist at Bank of Baroda, highlighted another potential tool, noting, "While RBI will continue with OMOs, there could be a stage where, because of liquidity coverage ratio requirements, banks may become reluctant to sell securities. In such a scenario, a temporary 1% reduction in the cash reserve ratio remains a distinct possibility." The central bank previously implemented a phased 1% CRR cut in June 2025, injecting ₹2.5 trillion into the system.
Inflation and Growth Dynamics Influencing Policy
Most economists believe the 125-basis-point easing cycle that commenced in 2025 has effectively concluded, driven by robust domestic growth indicators and inflation approaching the RBI's 4% target. Sakshi Gupta, principal economist at HDFC Bank, confirmed this perspective, stating, "This marks the end of the rate-cut cycle. Growth is accelerating, and inflation is gradually aligning back to 4%, thereby limiting scope for additional monetary action."
The MPC is also likely to await greater clarity from the new consumer price index series, scheduled for release on 12 February, before considering any substantial policy stance alterations. Deutsche Bank estimates that the revised CPI methodology could lower historical inflation readings and forecasts by approximately 10-20 basis points, primarily through reduced weighting of food items from 46% to about 41%.
External Factors and Policy Implications
Neither the recent government budget announcements nor the newly finalized US-India trade deal are expected to significantly influence Friday's policy decision. While the trade agreement may alleviate near-term pressure on the rupee and reduce the RBI's need for currency market intervention, economists anticipate minimal impact on government bond yields or broader monetary policy direction.
The consensus among analysts suggests that India's growth trajectory remains strong, with expectations of maintaining above 7.6% despite global economic uncertainties. As the RBI navigates this complex economic landscape, its immediate focus appears firmly fixed on managing liquidity conditions while maintaining stability in monetary policy parameters.
