New Delhi: The Reserve Bank of India (RBI) on Friday decided to keep policy interest rates unchanged, maintaining the repo rate at 5.25 per cent. The decision, taken by the central bank’s Monetary Policy Committee (MPC), means lending and deposit rates are expected to remain stable in the near term, offering relief to borrowers as equated monthly instalments (EMIs) on home and personal loans are unlikely to change.
Alongside the rate decision, the RBI marginally revised upward its projections for economic growth and inflation for FY26. Gross Domestic Product (GDP) growth has been raised to 7.4 per cent from the earlier estimate of 7.3 per cent, while retail inflation has been revised to 2.1 per cent from 2 per cent.
The MPC also retained its neutral policy stance, signalling a cautious, wait-and-watch approach as it monitors evolving domestic and global economic conditions. This pause follows a rate cut in December, when the MPC reduced the repo rate by 25 basis points to 5.25 per cent. With this, the cumulative reduction in policy rates during 2025 stood at 125 basis points, reflecting a prolonged phase of monetary easing.
Why RBI chose to pause
Announcing the policy, RBI Governor Sanjay Malhotra said several measures announced in the Union Budget are expected to support economic growth. The MPC’s decision reflects a combination of a favourable inflation outlook, resilient domestic demand, and rising external uncertainties.
Since the previous policy review, India has signed multiple trade agreements with the United States, the European Union, Oman and New Zealand. These agreements are expected to provide a buffer against global uncertainties and support medium- to long-term growth. However, the RBI noted that geopolitical developments and external headwinds have intensified, warranting close monitoring.
Despite these challenges, the successful completion of trade agreements, particularly with the US and the EU, is seen as positive for exports and investment flows. According to the central bank, these developments strengthen India’s external position even as global conditions remain volatile.
Growth supported by consumption and fiscal measures
Economic growth continues to be underpinned by robust domestic consumption, which is projected to grow by around 7 per cent in FY26. The consumption outlook has been strengthened by several factors, including income tax cuts announced in the Union Budget, rationalisation of GST rates, subdued inflation, and the cumulative impact of earlier rate cuts by the RBI.
In addition, statistical factors such as a lower GDP deflator contributed to stronger growth momentum in the first half of the fiscal year. The RBI noted that domestic economic conditions remain broadly resilient, even as global risks persist.
The central bank said the near-term outlook for growth remains favourable. Based on a comprehensive assessment of macroeconomic conditions, the MPC concluded that the current policy rate is appropriate and voted to maintain the status quo.
Inflation outlook remains benign
On the inflation front, headline inflation during November and December remained below the tolerance band of the RBI’s inflation target. Retail inflation, measured by the Consumer Price Index (CPI), rose from 0.71 per cent to 1.33 per cent in December 2025. Despite this increase, inflation stayed well within the RBI’s target range of 2–6 per cent, largely due to continued, though easing, deflation in food prices.
The RBI revised its CPI inflation outlook for FY26 slightly upward to 2.1 per cent. Inflation projections for the first two quarters of the next financial year stand at 4 per cent for Q1 and 4.2 per cent for Q2. The central bank attributed the modest upward revision primarily to higher prices of precious metals, which account for about 60–70 basis points of the increase. Underlying inflation, however, continues to remain low.
Impact on borrowers and depositors
With the repo rate unchanged, lending and deposit rates are expected to remain broadly stable in the near term. Loans linked to external benchmarks, particularly those directly linked to the repo rate, will not see any immediate change. As a result, borrowers with repo-linked loans are unlikely to experience any change in their EMIs.
However, loans linked to the marginal cost of funds-based lending rate (MCLR) could still see movement, as banks have the flexibility to adjust these rates based on their funding costs, liquidity conditions and deposit mobilisation. On the deposit side, interest rates are also expected to remain steady unless banks face sustained changes in liquidity or funding pressures.
Growth and inflation projections raised marginally
The RBI’s upward revision of growth and inflation forecasts reflects continued confidence in the domestic economy. In December, the central bank had raised its FY26 GDP growth projection by 50 basis points to 7.3 per cent. The latest estimate of 7.4 per cent aligns with the government’s first advance estimates for the fiscal year.
The RBI noted that economic activity remains resilient, supported by strong domestic demand even amid a challenging external environment. The growth outlook, according to the central bank, remains favourable, with policy decisions continuing to be guided by evolving macroeconomic conditions.
The road ahead
The RBI’s decision underscores its cautious approach. With growth holding firm, inflation under control and fiscal policy providing support, there appears to be no immediate need for further rate changes. At the same time, risks remain, including geopolitical tensions, volatile crude oil prices and shifts in global monetary policy.
Going forward, the MPC has reiterated that it will remain data-dependent, carefully balancing growth objectives with inflation control while navigating an uncertain global landscape.
