Why in news?
The Reserve Bank of India’s Monetary Policy Committee (MPC) met on 6 February 2026 and unanimously decided to keep the benchmark repo rate at 5.25 percent. The policy stance remains “neutral,” meaning the central bank is neither inclined to tighten nor ease monetary policy. Governor Sanjay Malhotra cited a benign inflation environment, strong economic growth and the positive impact of recent trade agreements with the U.S. and European Union as reasons for holding rates.
Background
The repo rate is the rate at which the RBI lends short‑term funds to commercial banks against government securities. It is a key instrument for controlling liquidity and inflation. By raising or lowering the repo rate, the central bank influences borrowing costs across the economy. Since February 2025, the RBI has cut the repo rate by 125 basis points, or 1.25 percentage points, to support growth as part of a monetary easing cycle.
The MPC, established in 2016, consists of six members—three from the RBI and three appointed by the government. It meets every two months to set the repo rate and publish forward guidance. A neutral stance suggests that future rate moves will depend on incoming data on inflation and growth.
Key elements of the February policy
- Trade deals easing pressure: Completion of a free‑trade pact with the European Union and a tariff reduction deal with the United States, expected to be finalised by March, has reduced external pressures on India’s economy.
- Inflation outlook: Inflation has been running below the RBI’s 4 percent target, with retail inflation averaging close to 2 percent in 2025; it briefly rose to 1.33 percent in December. The bank raised its inflation projection for the current year slightly to 2.1 percent.
- Growth projections: The RBI expects India’s economy to grow around 7.4 percent this financial year, supported by domestic demand and public investment. It forecasts growth of 6.9 percent in the April–June 2026 quarter and 7 percent in the following three months.
- Liquidity management: The central bank pledged proactive management of liquidity to keep borrowing costs stable, given the large government borrowing programme and foreign exchange interventions.
- Future stance: Economists expect the RBI to remain on hold for the near term, with additional easing possible only if growth falters or external shocks intensify.
Significance
- Borrowing costs: A steady repo rate implies that interest rates on mortgages, auto loans and business credit are likely to remain unchanged in the immediate future.
- Economic stability: Holding rates provides policy continuity while the economy digests recent trade deals and monitors global uncertainties.
- Signals to markets: A neutral stance indicates that the RBI is comfortable with current macroeconomic conditions but is prepared to adjust policy if inflation or growth diverges from projections.
Conclusion
By pausing its rate‑cutting cycle, the RBI has signalled confidence in India’s economic trajectory while keeping options open to respond to future challenges. The decision will influence borrowing costs, investment sentiment and currency markets in the months ahead.
Sources: Reuters
