News

The Reserve Bank of India’s Monetary Policy Committee began a three-day, bi-monthly review on Wednesday, February 4, with the outcome due at 10 am on Friday. Coming just days after the Union Budget and the India-US trade deal, the policy review arrives at a sensitive moment. Since the last policy review, in December, inflation has eased, growth signals are mixed and investors are largely expecting the RBI to hold rates steady while offering clearer cues on liquidity.

This MPC review follows a year of decisive monetary easing by the central bank. Since February last year, the RBI has cut the repo rate by a cumulative 125 basis points, bringing it down to 5.25 per cent. The rate cuts were aimed at supporting growth amid global uncertainty and easing financial conditions at home.

At its previous meeting in December, the RBI trimmed the repo rate by 25 basis points and simultaneously raised its growth forecast for the current financial year. That move signalled confidence in domestic demand, even as global risks persisted.

Inflation trends have given policymakers some comfort going into this meeting. Consumer Price Index inflation for December stood at 1.33 per cent year-on-year, well below the RBI’s medium-term target of 4 per cent for the 11th straight month. However, the monthly rise in prices was driven by costlier vegetables, pulses, meat and fish, eggs, spices and personal care items.

Economists caution that while headline inflation remains low, food prices and upcoming changes in the inflation base year could push numbers higher in the coming months. This has strengthened the argument for caution rather than further rate cuts.

The RBI currently expects the Indian economy to grow 7.3 per cent in 2025-26, a half percentage point higher than its earlier estimate. This uneven growth picture is likely to feature prominently in MPC discussions over the next three days.

Most economists and brokerages expect the RBI to hold the repo rate at 5.25 per cent and retain its neutral policy stance. A report by Nuvama Research said the central bank is likely to stay on hold, as transmission of earlier rate cuts to bank lending rates is still playing out and bond yields remain sticky.

Rather than changing rates, the RBI is expected to focus on managing liquidity conditions to ensure smooth functioning of financial markets.

Liquidity has emerged as a key concern ahead of this policy review. The RBI has already moved to ease the squeeze on liquidity, announcing steps that together will pump over Rs 2 lakh crore into the banking system. This includes bond purchases in the open market, a forex swap and variable rate repo operations, all aimed at ensuring banks have enough money to lend and credit growth isn’t choked.