The Reserve Bank of India decided to maintain the policy repo rate at 5.25% in its February 2026 Monetary Policy Committee meeting, reflecting a unanimous preference for stability in a resilient but evolving macroeconomic environment. The decision, announced by Governor Sanjay Malhotra on February 6, 2026, follows cumulative rate cuts of 125 basis points since early 2025, underscoring confidence in domestic growth while remaining vigilant to global risks. The standing deposit facility rate was retained at 5.00%, while the marginal standing facility rate and Bank Rate remain at 5.50%. The monetary policy stance continues to be neutral, allowing flexibility as new data emerges.

Economic Backdrop

India’s growth momentum remains robust. Real GDP growth for FY 2025–26 is estimated at 7.4%, supported primarily by private consumption growth of 7.0% and fixed investment growth of 7.8%. Real gross value added expanded by 7.3%, led by strong performance in services (8.8%) and a recovery in manufacturing (7.0%). While the trade deficit widened due to faster import growth, domestic demand conditions stayed resilient.

High-frequency indicators reinforce this strength. Reservoir levels stood at 66.6% of capacity, rabi sowing rose by 2.4%, and corporate profits increased 8.3% year-on-year in Q3, all pointing toward sustained momentum into FY 2026–27.

Growth projections for Q1 and Q2 of FY 2026–27 have been revised upward to 6.9% and 7.0%, respectively. This outlook is supported by improving rural demand, steady urban consumption aided by tax rationalisation expectations, and government capital expenditure growth of 11.5%. Ongoing and proposed trade agreements with major partners are expected to enhance export competitiveness and integrate India more deeply into global value chains, partially offsetting geopolitical and trade-related uncertainties. Overall risks to growth remain balanced, with the upcoming GDP series revision expected to refine medium-term projections.

Inflation Dynamics

Inflation conditions have remained benign, with headline CPI printing exceptionally low readings of 0.7% in November and 1.3% in December 2025. These outcomes were largely driven by sharp food price deflation and favourable base effects. Food inflation eased to –1.8% in December, while core inflation (excluding food and fuel) stayed stable around 2.6%, after adjusting for volatility in precious metals prices.

For FY 2025–26, CPI inflation is projected at 2.1%, with inflation expected to firm up gradually to 4.0% in Q1 and 4.2% in Q2 of FY 2026–27. Part of this pickup reflects higher precious metals prices, which could contribute 60–70 basis points to headline inflation. On the supply side, healthy kharif output, comfortable foodgrain buffer stocks, and positive rabi prospects continue to support the inflation outlook.

While upside risks persist from geopolitical developments, energy price volatility, and potential base effects, underlying inflationary pressures remain muted. The introduction of the revised CPI series later in February is expected to improve inflation assessment and forecasting accuracy going forward.

Global Context and External Sector

Global growth prospects for 2026 have marginally improved, supported by technology investment cycles and selective fiscal stimulus. However, inflation dynamics remain uneven across economies, resulting in divergent monetary policy paths. Heightened geopolitical tensions and trade frictions have disrupted supply chains and added volatility to global bond markets, although equity markets continue to draw support from technology-led earnings growth.

India’s external sector remains resilient amid these conditions. Foreign exchange reserves stood at $723.8 billion, providing over 11 months of import cover. Services exports grew 13.0% year-on-year in December, while remittances rose 10.7%. Although the merchandise trade deficit widened to $91.5 billion in Q3 FY26, foreign direct investment inflows increased 16.1% during April–November, helping keep the current account deficit at manageable levels. Exchange rate management remains market-determined, with RBI intervention aimed at smoothing excessive volatility.

Liquidity and Monetary Transmission

System liquidity remained in surplus, averaging ₹0.7 lakh crore on a daily basis since December. The RBI continued active liquidity management through open market operations, forex swaps, and variable rate instruments. Since the start of the easing cycle, transmission has been strong: weighted average lending rates on fresh loans declined by 105 basis points, while fresh deposit rates fell 95 basis points. Overall transmission of policy rate changes is estimated at around 94%, indicating effective pass-through.

Money market rates tightened marginally in January due to seasonal factors and redemptions, while the 10-year government bond yield rose to around 6.65%, tracking global movements. Credit growth remained healthy at 13.8% year-on-year, led by retail lending, MSMEs, and services.

Financial Stability and Policy Measures

The financial system continues to display strong fundamentals. Scheduled commercial banks reported a capital adequacy ratio of 17.24% and gross non-performing assets of 2.05%, while NBFCs maintained even higher capital buffers. The RBI announced several measures to enhance financial inclusion and consumer protection, including higher collateral-free loan limits for MSMEs, regulatory easing for smaller NBFCs, and new instruments to deepen bond markets.

Draft guidelines addressing mis-selling, recovery practices, fraud compensation, and digital safety aim to strengthen trust in the financial system. Capacity-building initiatives and financial literacy efforts further reinforce long-term stability.

Market Implications

Markets largely anticipated the policy pause, with bond yields steady and equities responding positively to growth signals. For borrowers and savers, policy continuity implies stable interest rates, while investors benefit from improved visibility on growth and inflation. Although markets increasingly view 5.25% as a near-term peak, future policy actions will remain data-dependent, particularly as new GDP and inflation series data become available.

Overall, the policy decision reflects confidence in India’s macroeconomic resilience, balancing strong growth prospects with a cautious approach to evolving global risks.