RBI Signals the End of Easing as Markets Begin to Question Comfort

The Reserve Bank of India’s latest Monetary Policy Committee review projected confidence in the economy’s resilience and in the central bank’s own policy calibration. Growth remains robust, inflation is within the tolerance band, and external buffers are assessed as strong. The policy repo rate was left unchanged at 5.25%, with the stance retained as neutral. Yet beneath this composure lay a clear signal. The easing cycle is over, even as financial conditions suggest that its after-effects are still unfolding.

The change in narrative was understated but meaningful. The earlier “Goldilocks” characterisation of steady growth and benign inflation was quietly dropped. In its place came an acknowledgement of rising inflation risks, fading base effects, and a real policy rate now hovering close to what the RBI considers optimal. Comfort with a real rate of around 1.0–1.25% effectively rules out further easing.

Markets, however, appear less convinced that holding rates steady equates to stability across the broader financial system.

Optimism Vs Transmission
Over the past 12–15 months, the RBI has delivered 125 basis points of rate cuts and injected around ₹13.5 trillion of liquidity through open market operations, cash reserve ratio reductions and foreign exchange swaps. Despite this, bond yields have climbed back to levels seen at the start of the easing cycle. The 10-year government bond yield has risen from about 6.25% in June 2025 to nearly 6.70% by February 2026, with markets increasingly pricing a move towards 7%.

This is less a temporary market reaction than a judgement on transmission.

Credit growth spiked briefly in December before slowing sharply in January. Deposit growth remains subdued at around 10.6%, while the credit-deposit ratio has risen beyond 82%, constraining banks’ ability to lend without raising funding costs. In such conditions, incremental liquidity has diminishing traction.

The RBI’s upbeat assessment of domestic fundamentals also sits uneasily with corporate performance. Sales growth remains muted at 4–5%, margins are under pressure, and cost optimisation is becoming the default corporate response. Equity markets face valuation headwinds as higher risk-free rates reset return expectations. On the fiscal side, rising yields are a growing concern. Interest payments now absorb roughly half of tax revenues and account for more than four-fifths of the fiscal deficit, narrowing the room for manoeuvre.

Policy stability, in this context, risks being mistaken for financial stability. The easing cycle may have ended, but the adjustment it triggered is far from complete.

External Buffers, Internal Fragilities
The RBI continues to draw comfort from strong external buffers. Foreign exchange reserves stand at $723.8 billion, while net foreign direct investment inflows of $5.6 billion between April and November 2025 provide a measure of support. Portfolio outflows of $7.5 billion over the same period are acknowledged but treated as manageable.

Optimism has also been attached to recent and ongoing free trade agreements with major partners, including the European Union, the United States and countries in the Middle East. These are expected to diversify trade flows and reduce vulnerability to external shocks. Yet the central bank’s own emphasis on closely monitoring evolving trade patterns points to uncertainty. Several major partners are seeking to turn trade deficits with India into surpluses. Combined with a widening deficit with China, the net impact on India’s external balance remains unclear.

Global conditions add further complexity.

Narrowing yield differentials with the United States and Japan, expectations of 5–6% rupee depreciation and elevated US Treasury yields near 4.25% are exerting upward pressure on domestic yields. Even if the dollar weakens over time, structural shifts, from persistent fiscal stress in advanced economies to gradual de-dollarisation, are unlikely to recreate the benign global backdrop of the past.

The MPC review, then, marks a transition rather than an endpoint.

The RBI is no longer easing, yet it is not tightening either. It is managing risks in an environment where conventional tools are losing potency. For investors and policymakers alike, the implicit message is clear. The era of rate cuts is over. What lies ahead is a more complex phase, where credibility, transmission and fiscal-financial linkages will matter far more than the headline policy rate.