Blog No:175: MPC Repo Rate Review - Pause or one more cut?

   Repo Rate Review Feb’ 26: 

 'pause' the rate and 'status quo' stance  likely

The last bi-monthly review meeting of the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) for FY26 is scheduled from 4th Feb' 26 and its decisions will be known on 6th Feb' 26. 

Key Statistics is a mixed bag:

Positives are:

1. CPI Inflation: CPI inflation at 1.33% in Dec' 25, though higher than the previous month, is still well below the lower band of the target rate of 2-6%, set by MPC.

2. Real GDP growth is estimated to grow by 7.4% in FY26 as against 6.5% recorded in FY25. 

3. Fex Reserves: continues to be on the increase and stood at USD 709.41 billion as on 23rd Jan' 26

4. Liquidity: RBI conducted USD/INR buy/sell swaps for USD25 billion in Dec' 25 and scheduled another buy/sell swap for USD10 billion in the first week of Feb' 26. Two '90 days tenor' Variable Repo Rate auctions were conducted in Jan' 26 resulting in a 'durable liquidity' of ₹1.36 lac crore, getting pumped into the banking system. OMO purchases auctions aggregating ₹1 lac cr. are being conducted to infuse more liquidity into the banking system. As per the last weekly statement published by RBI, durable liquidity in the banking system was ₹3.44 lac cr. and the average money placed by the banks in the SDF (standing deposit facility) with RBI in the last fortnight was ₹1.5 lac cr. Hence the liquidity in the banking system continues to be comfortable, which will enable the banks to aid the economic growth, through their lending. 

The points of Concern are:

a. Indian rupee versus USD breached ₹91 level per $ and threatens to go beyond ₹92 level also.

b. India's merchandise trade deficit widened to USD25 billion in Dec' 25 (with the monthly merchandise exports at USD39 billion and the  monthly merchandise imports at USD64 billion)

c. Foreign Portfolio Investors (FPIs) were net sellers of Indian equities worth ₹1.7 trillion in 2025, making it the highest annual outflow on record.

Pointers: While reviewing the repo rate and stance, if the union budget and FED rate are to be taken as pointers to decide: 

(i)the union budget presented by the FM is more of a consolidation to ensure sustained growth in the economy, than to flash out populist macro level incentives. 

(ii) Federal Reserve held its benchmark funds rate in the last week of Jan' 26(ranging between 3.50%-3.75%), after a string of three cuts in the last three meetings of  FOMC (Federal Open Markets Committee).

My Views:

Though 

(i) the cuts in the repo rate since last year (aggregating 125 bps so far) is just half of the total 250 bps raised in the period, prior to the present rate cut series and 

(ii) the inflation contained at less than 2% for the last four months, 

favour a decision of one more rate cut of 25 bps, the MPC might keep the repo rate unchanged and retain the stance as 'neutral' for the following reasons:

A.  The purpose of a rate cut is served only when the transmission takes place in the money market and in the lending rates of the banks. Of course, call money rate is hovering around the repo rate. But the last rate cut had little impact on the dated g-sec, with 10-year g-sec still ruling at the same level of 6.7% and the 5 year g-sec ruling at 6.4%. In respect of lending rates charged by the banks, only the existing loans, which are linked to repo rate, appear to get the transmission effect immediately. In respect of new loans linked to EBLR and those that are linked to internal bench marks like base rate, MCLR, the process appears to be slow, to say the least. In fact, some banks have shifted to fixed interest loans in some lucrative products to escape from the impact of the repo rate cut on their existing loans.

B. The GDP growth indicates that the economic activity has not slowed down, even when the inflation is under control.

C. As per the economic survey, banking credit expanded by 11.5% as of 28th November 2025 y-o-y, reflecting sustained lending activity to the productive sectors of the economy and stable demand conditions from the retail and MSME segments.

D. The three measures resorted to by RBI viz. conduct of long tenor variable repo rate auctions, periodical purchase of multi dated g-sec through OMO auctions and buy USD through swap auctions of three year tenor have already brought in enough 'durable liquidity' into the banking system, (which was ₹3.44 lac cr. as per the latest RBI's fortnightly statement). Hence the banks should be in a position to continue to lend to the productive sectors and also to the increased 'consumption needs' in the retail segment.

E. It is also not out of place to mention that since the credit growth outpaced the deposit growth across the banking system, some of the banks raise money through bulk deposits, at interest rates between 6.5%-7%. Since the banks continue to face pressure in raising new deposits, even from their existing customers, the transmission of any repo rate cut is unlikely, at least in respect of fixed deposits. 

So my expectation from the MPC is to call a 'pause in the repo rate' and to maintain 'status quo' in stance.

Regards

V. Viswanathan
CGM Retd. e-SBT

3rd February 2026