RBI Monetary Policy Review – February 2026: A Calibrated Pause in a Goldilocks Economy
Outlook Summary:
Looking ahead, RBI may cut 50 bps further in 2026, in line with the US Fed; India’s core CPI may hover around the 3.00-3.50% range, below 4.00% RBI targets
On
February 6, 2026, the Reserve Bank of India (RBI), under Governor Sanjay
Malhotra, concluded its last Monetary Policy Committee (MPC) meeting of the
financial year (2025-26). As highly expected, the six-member panel (MPC)
unanimously decided to keep the policy repo rate unchanged at 5.25% and also
hold all other key policy rates at Dec’26 levels. The RBI MPC continues its
neutral monetary policy stance, but one MPC member, Prof. Ram Singh, voted for
an accommodative stance. Looking ahead, the RBI MPC will be guided by the
evolving macroeconomic conditions and the outlook based on data from the new
series in charting the future course of monetary policy.
On
Friday, February 6, 2026, India’s Central Bank, RBI, holds all key policy rates
as highly expected.
●
Repo rate at 5.25% (Benchmark)
● Standing deposit facility (SDF) or the effective reverse repo rate
(ERR) at 5.00% (Floor of the corridor)
● Marginal standing facility (MSF) at 5.50% (Celling of the
corridor)
● Bank rates at 5.50%
The
Weighted Average Call Rate (WACR)-RBI’s actual operating target
of monetary policy was around 5.07% on February 5, 2026, and remains around the
lower bound of the policy corridor. RBI always aims to keep the WACR aligned
with the policy repo rate by adjusting banking liquidity time-to-time in both
directions (injections/absorptions). The current liquidity of the Indian
banking system is in a surplus of around INR 2.00 trillion, although moderated
to some extent from the peak of INR 2.50 trillion, still, it’s adequate to keep
the WACR near the lower bound of the policy rate corridor.
After a
100 bps cut of the cash reserve ratio (CRR) in H2CY25 (September-November), the
RBI also kept it steady at 3.00%. The RBI holds its key repo rate at 5.25% in
February 2026 after cutting it by 25 bps at the December meeting and a
cumulative 125 bps in 2025. The RBI holds its repo rate at a post-COVID high at
6.50% from February 2023 to January 2025 and then began cutting rates. RBI,
under the previous Governor Das, may have made a policy mistake by keeping
rates too high for too long despite a lower core inflation rate. This view was
also echoed by the Commerce Minister Goyal last year after signs of subdued
economic growth.
RBI’s
monetary policy Operational Insights
●
Targeting:
The RBI uses the WACR to ensure effective monetary transmission. If the WACR
drifts too far from the repo rate, the RBI uses LAF (Liquidity Adjustment
Facility) tools like Variable Rate Reverse Repo (VRRR) auctions to suck out
excess liquidity or repo operations/OMO to inject it.
● Liquidity Stance: The RBI maintained a
"Neutral" stance in its February 2026 policy meeting, suggesting that
rates may remain steady to support robust economic growth, projected at 7.4%
for FY26.
● Transmission: While the repo rate has been cut by
125 basis points since February 2025, the RBI is currently monitoring the
transmission to bank lending rates, which have seen a substantial fall of about
105 basis points.
On
the economic projections, the RBI raised its GDP growth forecast for FY26
to 7.4%, up from its earlier estimate of 7.3%. GDP growth for H1 of FY27 was
also revised upward, with growth projected at 6.9% in Q1 and 7.0% in Q2.
Meanwhile, inflation (CPI) for FY26 is projected at 2.1%. RBI also mentioned
that India’s core inflation excluding gold & silver (precious metals)
stands around +2.7% in December’25.
Overall,
RBI is quite hawkish on India’s resilient structural tailwinds despite cyclical
global headwinds (US/Trump tariffs tantrum). RBI is confident about India’s
economic growth prospects, while also seeing around 4.00% headline inflation
(CPI) by early 2027 due to the lower base effect. RBI also indicated to wait
for the new series of GDP and inflation data to adjust its economic projections
and thus continue to be on the sidelines in its next policy meeting in April.
The market
is still expecting RBI to cut rates by 25 bps each in June and December’26 to
keep the real repo rate at around 1.50% neutral range corridor. On February 6,
2026, in his post-policy meeting presser/Q&A, RBI Governor Malhotra also
mentioned a 1.40-1.90% (i.e., 1.50-2.00%) corridor as the current neutral
range. Thus, RBI may keep its real rate (actual repo rate-underlying average
core inflation) at around +1.50% by December 2026 to maintain the neutral
stance, which does not cause overheating or overcooling of the economy-help to
stay at Goldilocks status. If the average core CPI stays around 3.00-3.50% by
Dec’26,
The market
is still expecting RBI to cut rates by 25 bps each in June and December’26 to
keep the real repo rate at around 1.00-1.50% neutral range corridor. RBI may
keep the terminal repo rate at around 4.50-4.00% in the longer run, so that
Indian producers can access funds at globally competitive rates to compete with
their global peers in the coming age of trade globalisation (FTAs/BTAs).
Governor
Malhotra described the Indian economy as Goldilocks in nature- remaining on a
steady improving trajectory, supported by strong private consumption, fixed
investment, services sector buoyancy, manufacturing revival, healthy balance
sheets, robust credit growth, government capital expenditure, and favourable
agricultural prospects. Malhotra also stressed that recent developments —
including a potential landmark free trade agreement (FTA) with the US (February
2026) and the European Union (January 2026), alongside earlier trade pacts with
the UK, New Zealand, and Oman — have bolstered external sector resilience.
These deals are expected to enhance exports, attract investments, and support
the current account over the medium to long term.
India’s
headline Inflation (CPI) remains well below the 4% target and within the 2–6%
tolerance band, with headline CPI at multi-year lows (1.3% in December 2025).
High-frequency indicators point to sustained momentum, with Q2 FY26 GDP growth
at 8.2% (fastest since Q1 2024). The policy pause underscores a Goldilocks
environment: low inflation anchors stability, while domestic demand and trade
diversification tailwinds sustain expansion amid global geopolitical tensions
and cautious bond market sentiment. RBI will ensure the flow of credit at a
reasonable rate to the productive sector of the economy.
RBI
(Governor Malhotra) also views that the current real rate 2.50% (Repo rate
5.25%-core CPI 2.75%) is too high and above +2.00% upper band
(restrictive) of the intended real positive rate corridor (1.00%-accommodative;
1.50%-neutral; 2.00%-restrictive). Although RBI is officially maintaining a
neutral stance, in reality, if we consider 2.75% average core CPI (ex-precious
metals), the real positive rate is +2.50%-is actually in a restrictive zone.
Thus, to bring it back it in neutral zone, RBI has to cut at least 50 bps in
2026 in a calibrated manner. RBI Governor Malhotra emphasised that core and
underlying inflation remain very benign (barring precious metals), and the
economy is in a better position than in December 2025.
Highlights
of RBI Governor Malhotra’s Q&A (Presser) comments on February 26, 2026,
post-RBI MPC meet:
❖
Interest Rate Outlook & Strategy
● Lower for Longer Policy: Policy rates are
expected to remain at low levels for a long period and may even go down
further.
● Rate Cut Transmissions: While rates were
held at 5.25%, the previous 125 bps cut in 2025 is still being transmitted to
the real economy.
● Neutral Stance: The Neutral liquidity stance was
maintained to preserve flexibility. The Governor described the economy as being
in a "Goldilocks" spot, with growth improving and inflation under
control.
❖
Liquidity & Monetary
Transmission
● RBI’s duty is to provide ample & sufficient liquidity for the
economy’s productive needs using LAF tools like short-term VRRRs and OMOs;
long-term VRRs, and others; liquidity management is a continuous operation to
ensure proper transmission.
● Transmission has been good up to December 2025 across markets,
though some hardening occurred in money markets since then.
● While transmission has been "excellent" in overnight
markets, the RBI is now focused on ensuring these signals reach all market
segments, including bank lending and deposit rates.
● Tools include short- and long-term VRRs, OMOs, and others;
liquidity management is a continuous operation.
● The immediate target is anchoring overnight rates near the repo
rate, with proactive measures (including outside formal policy) maintaining
surplus liquidity.
● The Focus is on system liquidity, not CD ratios (which are
cyclical and vary with banks' business cycles).
● Banks will manage government borrowings efficiently; gross
borrowing appears large but is not significant in the overall context (only
higher by ~INR 0.20 trillion).
❖
Customer Protection & Regulatory
Changes
● Fraud Compensation: A new framework
was proposed to compensate victims of small-value fraudulent transactions up to
₹25,000 or up to 85% in some contexts for small-value fraudulent digital
transactions (as long as not mala fide/OTP shared negligently); these cases
dominate by volume, though smaller by value.
● Mis-selling Guidelines: The RBI will
issue draft guidelines to codify rules against mis-selling and regulate the
engagement of recovery agents; Draft guidelines forthcoming on mis-selling
(advertising, marketing, third-party products).
●
Digital Safety: A discussion paper will be published on enhancing digital payment
safety, potentially including additional authentication for vulnerable groups
like senior citizens. Customer centricity
remains a priority; additional measures (e.g., extra authentication for
vulnerable users) to enhance digital safety and trust.
❖
Inflation and Growth Details
●
Headline inflation remains well
below the tolerance band; slight upward revisions to early FY27 (Q1 at 4.0%, Q2
at 4.2%) are mainly due to precious metals (gold/silver), not food items like
onions/tomatoes.
●
The economy is in the same sweet
Goldilocks spot, with growth improving and inflation stable/benign.
●
Policy rates will remain at low
levels for a long period and may go down further, depending on data.
❖
Gold Loans and Sector-Specific
● The RBI is comfortable with gold loan portfolios; banks/NBFCs are
maintaining LTV ratios responsibly (often on the lower side).
● Close monitoring continues, with no concerns over aggressive
practices.
❖ On trade deals' impact: It's early; no
detailed assessment yet on GDP contribution due to lack of full details, but
they augur well for exports, investments, and current account; overall, the RBI
already added a 25 bps higher GDP growth rate for H1FY27.
❖ On liquidity focus: Emphasised
proactive/pre-emptive actions; overnight rate transmission expected across
markets.
❖ On government higher borrowing:
Net figure is lower-side; resources (loans) are raisable at reasonable prices
(rates); banks are capable of efficient management.
❖ On CD ratios/rates: Cyclical and
normal; not a primary concern.
❖ On new data series: Upcoming revised
GDP (base 2024=100, 27 Feb) and CPI series (12 Feb) will inform future RBI
projections.
❖ On policy path: Data-dependent; neutral stance
provides flexibility; low rates likely to persist.
Malhotra’s
Remarks and Policy Rationale
●
The current repo rate level is
appropriate given the positive near-term domestic inflation and growth
outlooks.
●
India's macroeconomic fundamentals,
including the external sector, are very strong, robust, and healthy.
●
The economy is on a steady improving
trajectory, with growth looking better and inflation remaining benign compared
to December 2025.
●
Core and underlying inflation are
very benign (barring precious metals volatility, which added 60–70 bps to
revisions).
●
High-frequency indicators point to
continued strong growth momentum in the near term.
●
Landmark trade deals with the US and
EU (along with the UK, New Zealand, and
Oman) will support sustained growth over a longer
period — boosting trade, exports, current account, and investments — though
it's too early to quantify exact GDP contributions due to limited details.
●
External headwinds have intensified
since December (geopolitical tensions reshaping the global order), but domestic
drivers (private consumption, investment, services/manufacturing revival)
remain dominant.
●
Bond market sentiments are cautious
due to fiscal sustainability concerns, but the RBI views the government
borrowing programme as manageable (focus on net borrowing being on the lower
side, conservative small savings estimates, treasury bills aiding yield curve
management).
Conclusions
Overall,
there are no major surprises or new announcements that emerged in Malhotra’s
Q&A comments; clarifications reinforced the RBI MPC's balanced, vigilant
(owlish/realistic) approach, neither hawkish nor dovish. But RBI Governor
indicated real rate is too high at this juncture and thus we can expect at
least 50 bps rate cut in 2026 (H1/H2)-most probably 25 bps each in June and
December’26. This will also be in line with the US Fed’s potential 50 bps rate
cut in 2026. Despite all the narratives, RBI has to maintain a proper real
policy rate differential with the Fed to maintain an appropriate USDINR rate,
net positive for Indian exports, without causing too much imported inflation.
The RBI
also has to maintain a certain real positive bond yield differential with the
Fed (adjusted inflation and currency exchange risk) to ensure foreign
investments in India’s resilient growth story. In the longer run, RBI may
maintain a 4.00/4.25% terminal repo rate against the Fed’s 3.00%. In that
scenario, borrowing costs in India will be structurally lower in line with
global peers, which will eventually make the economy more productive and
efficient. India may attain 8-10% real GDP growth without causing higher
inflation if overall economic productivity improves significantly. This will
ensure the vicious cycle of consumption-led growth and the revival of
much-awaited private CAPEX, which will eventually ensure inclusive economic
growth (‘U’ shaped instead of the present ‘K’ shaped) and maximum quality
employment in the country for its huge workforce.
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