It is unlikely that RBI will play Santa again in February

MUMBAI: Economists expect the Reserve Bank of India to keep its key policy rate unchanged at 5.25% in February as inflation starts rising from record lows and growth remains resilient, several economists said. They said the central bank is likely to retain policy space amid uncertainty over trade talks and upcoming changes in the inflation gauge. Eight out of 10 economists expect the RBI will not cut rates at the next Monetary Policy Committee meeting, scheduled between February 4 and 6, within a week of FM presenting the Union Budget.Consumer price inflation rose to 0.71% annualized in November from 0.25% in October, driven by persistent food price deflation and weak core inflation. Most economists say headline inflation appears to have bottomed out in October due to lower food prices and the one-time GST adjustment. They expect it to rise again, but remain below the RBI’s medium-term target of 4%. The RBI has cut the repo rate by 125 basis points since the start of the easing cycle in February, saying this would support growth as inflation remained favorable.

WHY A BREAK NOW?
Barclays said the bar for another cut is high. “We expect the RBI to be surprised on the higher side versus the last inflation forecast, making it harder to justify a cut in the February meeting,” the RBI said. Yes Bank, on the other hand, has noted global factors and currency risks. “We do not think the RBI wants to cut rates further despite the Fed implementing a rate cut… Some level of interest rate differential between the US and India remains necessary to attract foreign inflows,” the report said. The interest rate difference is 1.5-1.75%

The State Bank of India report notes that RBI has kept the door open for future steps but sees no immediate action.

“The repo rate of 5.25% will remain lower for longer,” the report said. Fitch’s research arm BMI is the only one to have predicted so far that the repo rate is close to the terminal level. Care Ratings sees room for relaxation, but expects caution. “While there is room for another 25 basis point rate cut based on inflation projections, we expect the MPC to only pause and reserve policy space for a future cut if growth prospects deteriorate,” the report said. RBI expects growth of 7.3% for FY26.IDFC expects a pause given its strong growth prospects. “We project FY26 GDP growth of 7.6% even without a trade deal. A rate cut will only become likely if downside risks to growth materialize,” the report said.

RBI has warned that prolonged rate pressure could increase inflation risk, noting that a 5% depreciation in the rupee could increase headline CPI by 0.35%. Economists said the upcoming revision of the CPI basket and weights could also change inflation dynamics. The new CPI series will be published in the first quarter of 2026, with 2024 as the base year.

Economists from Bank of Baroda and Kotak Mahindra Bank suggested there is scope for a rate cut in February.

Nomura expects a pause in February and a 25 basis point cut in April, while ICRA expects fiscal signals to guide policy. “Our base case scenario suggests a pause in the MPC’s February 2026 policy review,” the report said.