India MPC Preview: Inflation Low, Rupee Lower: Why RBI May Keep Rates on Ice
The RBI is expected to hold rates at 5.25%, resisting pressure for further easing. With inflation near historic lows but the rupee under strain and private investment still muted, policy will focus on anchoring stability, managing liquidity, and allowing past cuts to percolate. Further accommodation is unlikely in H1 unless growth meaningfully disappoints or capital flows sharply reverse.
As the Reserve Bank of India’s Monetary Policy Committee (MPC) prepares to meet on 4–6 February, we anticipate no change in the policy rate. RBI will maintain the benchmark repo rate at 5.25% in H1 2026, and opt to watch earlier cuts filter through the economy before making more moves. The backdrop to this deliberation is unusually benign inflation, uneven growth dynamics and only a limited fiscal push from the Union Budget unveiled on 1 February 2026. India’s headline CPI has lingered well below the central bank’s 4% midpoint target, with the December 2025 print at around 1.33%. Even if upcoming January data are only gradually upward‑moving, this low trajectory gives the RBI room to maintain an accommodative stance without jeopardising inflation credibility.
But beneath the surface lies a tangled policy conundrum: growth remains uneven and heavily reliant on government support, while private investment continues to lag. Much of the growth momentum reflects government outlays and tax cuts rather than a durable pickup in business investment—a reality that complicates the RBI’s decision calculus. Even the latest FY27 budget ensures that growth remains capex driven with a 7.7% y/y increase to INR 12.2tn.
A Cautious Pause, Not a Pause of Conviction
Since February 2025, the MPC has delivered 125 basis points of cumulative rate cuts, ranging from targeted 25‑bp trims to a larger mid‑year adjustment. Yet despite ample space on inflation, the RBI has chosen to keep its stance neutral, balancing the need for support with concerns over the external environment. Regional banks report that transmission has been patchy: loans linked to the policy rate have seen some easing, but deposit rates have remained sticky, dampening the stimulatory effect of prior cuts. Complicating matters further is the performance of the Indian rupee, which has struggled under pressure from foreign portfolio outflows estimated at about USD 4bn of equity sales in January and a stronger US dollar complex driven by prospects of sustained US rate differentials. A weak rupee raises the spectre of imported inflation, even if headline domestic price growth remains subdued. However, the INR has made recent gains today, on the back of the US-India trade deal, and the expectation is that the deal will provide some buttress to the otherwise under-pressure currency.
Budget’s Modest Growth Pull and Fiscal Texture
That currency outlook intersects with the fiscal picture revealed in FY27, which both anchors and constrains policy. The government has set a fiscal deficit target of 4.3% of GDP and a debt‑to‑GDP ratio aimed at gradual consolidation, while upping capital expenditure to INR 2.2tn trillion, the highest in over a decade. Notably, the budget’s content lacked headline reforms or a fresh structural impetus to ignite private capex. Major sectors were left to absorb tax tweaks and broader spending priorities rather than new incentives, and proposals such as derivative tax hikes weighed on markets on budget day.
This leaves the RBI in a nuanced position. On the one hand, it can point to benign inflation and a credible fiscal medium‑term framework as justification for standing pat. On the other hand, limited private investment, recurrent currency pressure, and elevated global uncertainty argue for caution rather than expedient cuts.
Transmission and Forward Guidance
RBI officials have previously signalled that its remit is not solely to ease but to ensure effective transmission of existing policy. Given the deposit rate rigidity in the banking system and continued liquidity management operations, including FX swaps and targeted bond purchases, the central bank is trying to balance liquidity, currency stability and credit growth without destabilising the macro backdrop.
Looking ahead, we expect RBI to maintain a neutral bias through much of H1-2026, monitoring global commodity prices, the trajectory of inflation prints, and currency flows before contemplating any further cuts. If the rupee stabilises and private investment does not weaken further, there could be scope for modest easing in H2, possibly once the full translational effect of budget and rate cuts is visible in credit and capex data.