In line with expectations, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) unanimously decided to hold the repo rate — the key policy rate — unchanged at 5.25%.
The RBI lifted its FY26 gross domestic product (GDP) forecast to 7.4% from an earlier estimate of 7.3%. It also revised upwards the projection for consumer price index (CPI) inflation to 2.1% from 2%.
“The Indian economy continues to register high growth despite a challenging external environment clouded by geo-political uncertainties. Benign inflation provides the leeway to remain growth-supportive while preserving financial stability,” RBI Governor Sanjay Malhotra said while announcing the monetary policy.
“After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the MPC voted unanimously to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 5.25%,” he added. The LAF is a monetary policy tool used by the RBI to manage daily liquidity in the country’s banking system.
A status quo on the policy rate would mean that their EMIs on home, vehicle, personal corporate and small business loans are unlikely to change.
The MPC decision on Friday to keep the repo rate unchanged comes on the heels of a rate cut in December, when the six-member committee lowered the repo rate by 25 basis points (bps) to 5.25%. This brought the cumulative reduction in policy rates in 2025 to 125 bps, marking a period of sustained monetary easing.
The six-member rate-setting panel, by a 5:1 majority, voted to keep the policy stance as ‘neutral’, with one of the external members favouring a shift to an accommodative stance.
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When asked if 5.25% is the terminal repo rate, Malhotra said that given the state of the economy, he foresees the rate to remain at the current levels over the next 9-12 months, indicating a long pause.
He, however, stated that with inflation remaining benign, policy rates will continue to be at low levels for a long period of time. “Whether they will go down even further, I will leave it for the MPC to decide going forward,” he noted.
“After a long season of rate cuts, we believe the RBI has pivoted to steady policy rates for the foreseeable future,” HSBC economists Pranjul Bhandari and Aayushi Chaudhary said in a report.
Growth momentum
Malhotra noted high frequency indicators suggest continuation of the strong growth momentum in the third quarter of FY26 and beyond.
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“With the signing of a landmark trade deal with the EU and the US trade agreement in sight, growth momentum is likely to be sustained for a longer period,” he said.
While rural demand remains steady, recovery in urban consumption is likely to strengthen further, supported by GST rationalisation and monetary easing. Buoyed by positive growth prospects, the RBI upgraded its real GDP growth estimate for FY26 to 7.4%, and for Q1 and Q2 of FY27 to 6.9% (from 6.7%) and 7% (from 6.8%), respectively. The bank, however, deferred FY27 GDP projection to the April policy review as the new GDP series will be released later in the month.
“The MPC will be guided by the evolving macroeconomic conditions and the outlook based on data from the new series in charting the future course of monetary policy,” Malhotra said.
He cautioned that spillovers emanating from geopolitical tensions, volatility in international financial markets and shifting trade patterns could threaten the growth outlook.
Uptick in inflation
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Malhotra said that headline inflation during November-December remained below the tolerance band of the inflation target. In December, CPI rose to 1.33% from 0.71% in the previous month. Near-term outlook suggests that food supply prospects remain bright on the back of healthy kharif production, sufficient buffer stocks of foodgrains, favourable rabi sowing and adequate reservoir levels, he said. However, geopolitical uncertainty coupled with volatility in energy prices and adverse weather events pose upside risks to inflation.
“In terms of the headline inflation trajectory, despite the anticipated momentum being muted, unfavourable base effects stemming from large decline in prices observed during Q4 FY25 would lead to an uptick in y-o-y inflation in Q4 FY26,” the governor said.
The central bank revised upward its FY26 CPI inflation estimate to 2.1%, with Q4 print now seen at 3.2% as against the earlier 2.9%. CPI inflation for Q1 and Q2 of FY27 are now projected at 4% and 4.2%, respectively, up from earlier estimates of 3.9% and 4%. Full report on