New Delhi, February 2: The Reserve Bank of India (RBI) is expected to hold back on further interest rate cuts at its Monetary Policy Committee (MPC) meeting scheduled from February 4 to 6. Economists suggest that while the RBI may avoid lowering policy rates now, it could take direct measures to manage liquidity, bond market stability, and currency risks.
Since February 2025, the RBI has reduced the repo rate by a total of 125 basis points, bringing it down to 5.25 percent. DBS Bank’s Executive Director and Senior Economist Radhika Rao noted that the government remains committed to fiscal consolidation, limiting the scope for major shifts in monetary policy.
After the MPC cut rates in December 2025, another reduction in the upcoming meeting seems unlikely. Rao added that the RBI may continue bond purchases through this quarter and the April-June 2026 period. Given the government’s record-level borrowing projected in the 2027 budget, RBI is expected to exercise caution to keep borrowing costs under control.
Despite trade tensions, economic growth persists, but inflation has risen above its low point. The rupee remains under pressure, hitting new lows, and banks face challenges in mobilising deposits.
Economists view the 2026 Union Budget as supportive of economic stability, with continued fiscal consolidation. The government’s debt-to-GDP ratio is expected to fall by about 0.5 percent and the fiscal deficit to narrow to 4.3 percent. Improvements in revenue and primary deficits are also anticipated.
Rao warned that further interest rate cuts might trigger outflows from rate-sensitive portfolio investments, prompting RBI’s cautious stance. Recently, RBI announced liquidity-enhancing measures injecting over ₹2 lakh crore into the banking system through bond purchases, foreign exchange swaps, and variable rate repo operations based on a review of current financial conditions.
According to SBI Research, despite the 125 basis point repo rate cut and liquidity infusion of ₹6.6 lakh crore through open market operations this fiscal year, bond yields have not fallen significantly due to uneven liquidity effects across market segments. SBI recommends RBI focus open market operations on more liquid bonds to influence yields effectively, suggesting operations on older 10-year bonds with a 6.33 percent coupon instead of the current 6.48 percent bonds.
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