RBI Policy: A prolonged pause on rates may already be underway

The POC stressed that excluding precious metals, underlying inflation pressures were muted and that barring volatility on account of gold and silver, core inflation was expected to remain range-bound

In line with expectations, the Monetary Policy Committee (MPC) maintained status quo on the policy rates as well as the stance in its final meeting for FY2026. 

  The robust growth momentum and favourable near-term outlook, a slight upward revision in the inflation outlook, and the upcoming changes in the new CPI and GDP series that would lead to a reassessment of the growth-inflation trajectory, likely nudged the Committee to hold steady. 

  Notably, while the vote on the policy rates was unanimous, one member voted to change the stance to accommodative from neutral. Nevertheless, the tone of the policy largely seemed neutral.

 

 

On the growth front, the MPC reiterated the First Advance Estimates (FAE) for FY2026, while abstaining from giving forecasts for H2-FY2026. However, it highlighted that activity was likely to remain strong in FY2027, aided by both private consumption and investment activity, with the latter also garnering support from the Government’s continued thrust on capital expenditure. 

  On the external front, it expects merchandise exports to get a boost from the prospective trade deal with the US, as well as the pact with the European Union. Overall, it has raised the GDP growth projections for Q1 and Q2-FY2027 by 20 basis points (bps) each to 6.9 per cent and 7 per cent, respectively, as compared to those given in the December 2025 policy. 

 

The MPC also revised its CPI inflation projections upwards, although this seemingly stemmed from the momentum seen in the prices of precious metals. The Committee specifically stressed that excluding precious metals, underlying inflation pressures were muted and that barring volatility on account of gold and silver, core inflation was expected to remain rangebound. It raised the Q4-FY2026 forecast by 30 bps to 3.2 per cent, taking the expected FY2026 print to 2.1 per cent from 2 per cent earlier. Further, it hiked the estimate for Q1-FY2027 by 10 bps to 4 per cent and that for Q2-FY2027 by 20 bps to 4.2 per cent.

 

Notably, these growth and inflation forecasts are based on the old series for GDP and CPI, respectively, and the RBI Governor deferred the full-year projections to the April 2026 meeting, given that the new series for both these metrics would be released later this month. We had expected the MPC to avoid tweaking its growth and inflation projections in this meeting, given that the release of the new CPI and GDP series would require a reassessment of the growth-inflation trajectory, making these forecasts redundant.  

 

For instance, the new all-India group wise weights available in the Expert Group Report on Comprehensive Updation of Consumer Price Index points to a significant fall in the weight of the food and beverages (F&B) segment to 36.8 per cent from 45.9 per cent currently. Rough calculations using group-level weights would suggest that this change would imply that the CPI inflation print may have averaged higher during 9M-FY2026 from the current 1.7 per cent, given the role of F&B in driving the headline inflation print lower during this period. Conversely, this could also mean that the expected uptick in FY2027 would be tempered, as this too is largely expected to be driven by a reversal in the F&B segment to an inflation in the next fiscal from deflation in FY2026.

 

Similarly, the new GDP series that will be released on February 27, 2026, may entail changes in the size of the economy (in nominal and real terms) as well as the growth rates during FY 2024-2026, the period for which back data will be available. This will necessitate a reassessment of the past growth outcomes as well as help us to fine tune our projections for the near-term outlook.

 

The upcoming overhaul of these datasets was expected to lead to no changes on the policy front in this MPC meeting. The marginal hardening in growth and inflation projections, based on the old series is also likely to have supported the case for a status quo. 

 

Looking ahead, while the MPC has stressed on underlying inflation pressures remaining muted, the case for further policy moves will entirely depend on changes in the growth-inflation assessment. For instance, if expectations around inflation for FY2027 end up being more benign owing to weight changes, it would suggest that forward looking real rates would be higher, providing headroom for additional rate cuts. 

  Likewise, if the recent growth outcomes (H1 FY2026: +8.0 per cent) are revised downwards, and entail a downward shift in the growth trajectory, then this too would also support policy easing. However, we think there is a higher likelihood that a prolonged pause is already underway. 

 

Interestingly, on the liquidity front, the RBI Governor’s statement was quite comforting with the assurances to ensure sufficient liquidity to meet the productive requirements of the economy and to facilitate monetary policy transmission. He also stressed sufficient allowance for unanticipated fluctuations in Government cash balances, changes in currency in circulation, and forex intervention, thereby providing strong signals to the market. Bond yields, however, have hardened marginally, possibly more swayed by the upcoming challenging supply-demand dynamics for the Government securities market.

 

Aditi Nayar, Chief Economist, Head- Research & Outreach, ICRA, View are her own.