Will Reserve Bank of India stay on hold after 125 bps cuts? What to expect from the bi-monthly MPC meet

The Reserve Bank of India’s Monetary Policy Committee (MPC), headed by Governor Sanjay Malhotra, is widely expected to maintain the status quo on interest rates when it announces its bi-monthly monetary policy decision on Friday, February 6.

The policy outcome will come after three days of deliberations, and against the backdrop of a growth-oriented Union Budget and the recently announced India–US trade deal.

Experts note that the Reserve Bank of India has already delivered cumulative repo rate cuts of 125 basis points since February last year, bringing the policy rate down to 5.25%.

With no immediate pressures on either the growth or inflation fronts, analysts expect the central bank to pause further easing.

“Since the last policy, one of the major policy changes is the EU-India and US-India trade deal resulting in reduction in tariffs on India to 18% from 50% earlier. Clearly, India has now one of the lowest tariffs among Asian countries which will help in improving our export competitiveness,” SBI Research said in a report.

However, it cautioned that the global economic environment remains uncertain, and its Geo-Economics Stress Index indicates that heightened uncertainty typically translates into economic stress with a lag of three to four months.

The report also highlighted recent volatility in financial markets, noting that metal prices have recovered after a sharp sell-off last week, while the rupee has fluctuated between 89 and 92 against the US dollar over the past two months.

The report said revised CPI weights could raise headline inflation marginally by 20–30 basis points.

It also pointed out that despite policy rate easing, government bond yields have hardened in recent periods, suggesting that the choice of securities could influence the effectiveness of open market operations.

“RBI is thus likely to maintain status quo in the upcoming policy,” SBI Research said.

Bank of America economist Rahul Bajoria said the trade deal has reduced growth-related uncertainty, prompting the brokerage to revise its policy expectations.

While there had been room for a growth-supportive rate cut earlier, Bajoria said the deal has improved growth certainty and high-frequency indicators suggest that the current momentum can be sustained.

Bank of America has, therefore, changed its call for a 25-basis-point rate cut to a hold for the February 6 meeting, and expects the MPC to retain a neutral policy stance.

“We believe RBI is now done cutting rates but will continue to manage its liquidity provisions carefully to ensure rate transmission remains active,” the report said.