RBI Holds Rates, Signals Comfort With Growth–Inflation Mix

A dovish hold was expected and was delivered by the Monetary Policy Committee today, with the Reserve Bank of India Governor Sanjay Malhotra saying benign inflation was helping the committee to stay the course of supporting growth.

The MPC voted unanimously to keep the policy repo rate unchanged at 5.25% today, extending the pause amid a benign inflation backdrop and resilient domestic growth. The standing deposit facility rate remained at 5.00%, while the marginal standing facility and bank rate stayed at 5.50%.

The MPC also retained its neutral policy stance, suggesting little urgency to recalibrate monetary settings even as inflation undershot the formal target band in recent months.

The central bank assessed that economic momentum remained intact, despite global financial conditions turning less predictable. Real GDP growth for 2025–26 was estimated at 7.4% year on year, supported primarily by private consumption and fixed investment. Services activity continued to anchor expansion, agriculture remained resilient, and manufacturing showed signs of revival.

Looking ahead, the MPC revised up its growth projections for the January–March and April–June quarters of 2026–27 to 6.9% and 7.0%, respectively. The upgrade reflected sustained domestic demand, healthy capacity utilisation, robust credit growth and the government’s continued emphasis on capital expenditure.

Trade diversification through recently concluded agreements with the European Union, New Zealand and Oman, along with a prospective US deal, was also cited as a supportive factor for the external sector.

At the same time, the MPC flagged persistent risks from geopolitical tensions, volatility in global financial markets and uncertainty around commodity prices. Net external demand continued to act as a drag on growth, with imports outpacing exports, even as services exports remained strong.

Base effects loom
Inflation dynamics remained unusually soft through the end of 2025. Headline CPI inflation came in at 0.7% in November and 1.3% in December, well below the tolerance band of the inflation target. Food prices stayed in deflation, fuel inflation remained moderate, and core inflation excluding food and fuel held steady at 2.6% in December when gold was excluded.

The MPC projected CPI inflation at 2.1% for 2025–26, with a rise to 3.2% in the January–March quarter due largely to unfavourable base effects from last year’s sharp price declines. Inflation for the first half of 2026–27 was projected at 4.0% and 4.2% in the April–June and July–September periods, respectively.

While underlying price pressures were assessed as muted, the committee acknowledged upside risks from precious metal prices, energy volatility, adverse weather events and geopolitical uncertainty. Even so, risks to the inflation outlook were judged to be evenly balanced, reinforcing the MPC’s comfort with letting the inflation trajectory normalise rather than responding pre-emptively.

Neutral stance, asymmetric comfort
The MPC concluded that the prevailing policy rate remained appropriate. The committee reiterated that monetary policy would stay data-dependent, particularly as India prepares to transition to new GDP and CPI series with a 2024 base later this month.

All members voted to maintain the policy rate and neutral stance, although external member Ram Singh reiterated his preference for a shift to an accommodative stance. The majority view, however, reflected comfort with the existing growth–inflation trade-off and a preference for preserving policy flexibility as global conditions evolve.

Markets will now focus on the upcoming release of the revised national accounts and inflation series, which will inform the April policy review. With inflation currently well below target and growth holding up, the policy framework appears calibrated for patience rather than pre-emption.

The message was clear: absent sharper signals from the new data series or a material shift in global conditions, the central bank sees little reason to alter course.