RBI’s Easiest Decision May Be to Do Nothing

As attention shifts to the Union Budget for 2026-27, India’s next monetary policy review risks slipping under the radar. That would be a mistake. For banks, markets and the broader financial system, the Reserve Bank of India’s February decision matters more than the fiscal headlines. The most likely outcome is also the least dramatic. The central bank is set to keep the repo rate unchanged at 5.25%, and doing so would signal not inertia, but confidence.

Monetary policy has already delivered substantial accommodation. Since the easing cycle began, the repo rate has been cut by 125 basis points, with most of the reduction concentrated in the current financial year. Liquidity conditions have been loosened aggressively through cash reserve ratio cuts, open market operations, forex swaps and variable rate repos. The cumulative injection of liquidity this year is unprecedented. Transmission is underway and still unfolding.

That matters because the Indian economy does not currently present a compelling case for urgency. Growth remains resilient and inflation is no longer a binding constraint. Real GDP growth is tracking above 7%, broadly in line with official projections, while headline consumer inflation has remained comfortably within the tolerance band. With demand holding up and price pressures contained, the policy trade-off that once demanded swift easing has eased itself.

The more relevant question is whether further rate cuts would meaningfully improve outcomes. On that score, the evidence is mixed. A majority of bank loans are now linked to external benchmarks, ensuring faster transmission. Lending rates on fresh loans have already adjusted down sharply, while deposit rates are falling even faster. That asymmetry is beginning to bite. Net interest margins are under pressure, as liabilities reprice with a lag while benchmark-linked assets reset immediately.

Banks are already feeling the strain. Despite ample system liquidity, lenders have stepped up issuance of certificates of deposit at elevated rates to support credit growth. The credit-to-deposit ratio remains high, leaving little room for aggressive balance-sheet expansion without additional funding stress. In a bank-dominated financial system, weakening intermediation capacity would be a perverse outcome of over-easing.

The argument for caution strengthens when viewed through the external lens. Global conditions are becoming less forgiving. Trade tensions remain unresolved, global merchandise trade growth is slowing sharply, and policy uncertainty is weighing on investment sentiment. Capital flows into emerging markets have turned volatile. The rupee has come under sustained pressure, even as foreign exchange reserves have held up due to active management.

A further rate cut at this juncture would risk amplifying currency pressures without delivering commensurate domestic benefits. That is not a hypothetical concern. With advanced economy central banks signalling prolonged caution and holding rates steady, India’s relative yield advantage has already narrowed. Preserving macro-financial stability in this environment requires restraint as much as responsiveness.

Fiscal signals add another layer of comfort. The Budget has reaffirmed a commitment to consolidation, with a credible glide path for the fiscal deficit and public debt. That reduces the burden on monetary policy to offset fiscal excess. It also creates space for the RBI to focus on transmission and financial stability rather than headline stimulus.

The stance debate within the Monetary Policy Committee is likely to be more animated than the headline decision suggests. External risks, currency dynamics, and global policy uncertainty will test the case for further easing. Yet those same factors argue against haste. With liquidity already abundant and policy rates well below their recent peaks, patience becomes a policy choice rather than a default.

Holding the repo rate steady would not imply indifference to growth. It would acknowledge that monetary policy works with lags and that much of the impulse from earlier actions is still feeding through. It would also recognise that banking system health is a precondition for sustained credit expansion, especially for sectors such as micro, small and medium enterprises that rely almost exclusively on bank financing.

In that sense, a pause would be an active signal. It would tell markets that the RBI is comfortable with the current growth-inflation mix, alert to external vulnerabilities, and unwilling to sacrifice financial stability for marginal gains. At a time when global uncertainty is rising and domestic conditions are broadly supportive, the most effective message the central bank can send is that it sees no need to rush.

Sometimes, the strongest policy signal is the decision to wait.