The Reserve Bank of India’s Monetary Policy Committee (MPC) has chosen continuity over change. In its February 6 meeting, the MPC decided to keep the repo rate unchanged at 5.25%, signalling confidence in India’s growth momentum and comfort with the inflation trajectory, even as global uncertainties persist. The decision, taken after the Union Budget and recent trade agreements with major economies, marks a calibrated pause after an extended easing cycle.
What did the MPC decide?
The six-member MPC of the maintained the status quo on policy rates, keeping the repo rate at 5.25%. It also retained a “neutral” policy stance, indicating flexibility to either tighten or ease policy depending on how growth, inflation, and global conditions evolve.
Alongside the rate decision, the MPC marginally revised up:
- GDP growth for FY26 to 7.4% (from 7.3%)
- Retail inflation for FY26 to 2.1% (from 2.0%)
Context: a pause after sustained easing
The February decision comes after a 25 basis point rate cut in December, which took the repo rate to 5.25%. That cut capped a cumulative easing of 125 basis points over 2025, reflecting the RBI’s earlier focus on supporting growth amid easing inflation.
With that support already in place, the MPC appears to be assessing how these measures transmit through the economy before taking further steps.
Why did the RBI hold rates steady?
Explaining the decision, RBI Governor pointed to a combination of supportive domestic factors and lingering external risks.
On the positive side:
- Inflation remains benign and well within the 2–6% target band
- Growth momentum is strong, supported by consumption and fiscal measures
- Recent trade agreements with the US, EU, Oman, and New Zealand are expected to improve export prospects and capital flows
At the same time, global geopolitical tensions, volatile commodity prices, and divergent monetary policies across advanced economies warrant caution. A pause allows the RBI to preserve policy space in case external shocks intensify.
Growth outlook: consumption and trade tailwinds
India’s growth outlook remains robust. Consumption is projected to expand by about 7% in FY26, aided by income tax cuts in the Union Budget, GST rationalisation, subdued inflation, and the cumulative impact of earlier rate cuts.
Statistical factors, such as a low GDP deflator due to low inflation, have also boosted real growth numbers, particularly in the first half of the fiscal year. The government’s first advance estimates align with the RBI’s projection, placing FY26 growth at 7.4%.
Inflation outlook: comfortable but watched closely
Retail inflation, measured by the Consumer Price Index (CPI), edged up from 0.71% to 1.33% in December 2025, but remains far below the RBI’s upper tolerance limit. Food price deflation, though easing, continues to anchor headline inflation.
The MPC revised CPI inflation projections for the first half of the next year to 4% (Q1) and 4.2% (Q2), still close to the 4% target. The slight upward revision is largely attributed to higher prices of precious metals, while underlying inflation pressures remain muted.
What does this mean for loans and deposits?
With the repo rate unchanged, borrowers with repo-linked loans can expect stability in their equated monthly instalments (EMIs). There is no immediate impact on home loans, personal loans, or other credit products linked directly to the policy rate.
However, loans linked to the marginal cost of funds-based lending rate (MCLR) could still see adjustments, depending on banks’ funding costs and liquidity conditions. Deposit rates, too, are likely to remain stable in the near term unless liquidity tightens significantly.
Why the neutral stance matters
By retaining a neutral stance, the MPC has avoided committing itself to either further easing or tightening. This signals that future decisions will be data-dependent, shaped by how inflation evolves, how global risks play out, and how domestic demand responds to fiscal and trade-related stimuli.
The road ahead for monetary policy
For now, the RBI appears comfortable with a wait-and-watch approach. Growth is holding firm, inflation is under control, and fiscal policy continues to provide support. Trade agreements with the US and EU add a medium-term growth cushion.
That said, risks remain — from geopolitical tensions and crude oil price volatility to shifts in global financial conditions. The February pause reflects an effort to balance optimism with caution, preserving flexibility in an uncertain global environment.
What to note for Prelims?
- The repo rate is the RBI’s key policy rate.
- The MPC consists of six members and targets CPI inflation at 4% (±2%).
- A neutral stance allows flexibility in future policy actions.
- Repo-linked loans transmit policy changes faster than MCLR-linked loans.
What to note for Mains?
- Analyse the rationale behind the RBI’s decision to pause after sustained easing.
- Discuss how trade agreements influence growth and monetary policy choices.
- Examine the link between inflation dynamics and policy stance decisions.
- Evaluate the importance of policy flexibility in a volatile global environment.
