The Reserve Bank of India (RBI) is scheduled to convene its monetary policy committee (MPC) meeting from February 4-6. Economists anticipate that the MPC will opt for a pause on policy rate cuts while the central bank addresses liquidity, bond stability, and currency-related risks. Since February 2025, the RBI has already reduced the repo rate by 125 basis points to 5.25%.
Radhika Rao, Executive Director and Senior Economist at DBS Bank, mentioned, “With the government staying committed to its fiscal consolidation path, significant impacts on monetary policy direction are not foreseen.” The MPC, which had lowered rates in December 2025, is likely to abstain from further rate cuts in the upcoming meeting.
Rao further stated, “We anticipate continued bond purchases in the current quarter and in April-June 2026. Given the high borrowings outlined in the FY27 Budget, the central bank may focus on agile money market operations to manage borrowing costs effectively.” Despite trade tensions, the growth momentum remains robust, while inflation has risen from its lows. The rupee has been under consistent pressure, depreciating to new lows successively. Rao highlighted the challenge of deposit mobilization.
The Union Budget 2026 is aimed at upholding macroeconomic stability and policy continuity. Fiscal consolidation will persist, with a projected decline in the center’s debt-to-GDP ratio by approximately 0.5% and an expected narrowing of the fiscal deficit to 4.3% of GDP. Rao emphasized that further rate cuts could lead to increased repatriation of rate-sensitive portfolio flows.
Recently, the RBI announced liquidity-enhancing measures to infuse over Rs 2 lakh crore into the banking system to alleviate liquidity strains. Through open market bond purchases, foreign exchange swaps, and variable rate repo operations, the Central Bank aims to ease liquidity conditions following a review of the current financial environment. Despite a 125 basis points repo rate cut and liquidity injections in the current fiscal, yields have not shown significant declines, leading to uneven transmission across market segments.
SBI Research suggested, “RBI should conduct open market operations in liquid papers to effectively impact yields. For instance, targeting the 10-year paper at 6.48% 2035, the RBI could focus on the preceding 10-year paper at 6.33% 2035 or the immediate outgoing benchmark paper.”
