The confidence is visible in the numbers. The RBI raised its real GDP growth estimate for the first half of FY27 by 20 basis points to 7 per cent, implicitly betting on positive spillovers from recently announced trade deals and resilient domestic demand. On inflation, the tone was more nuanced. Headline CPI forecasts for Q1 and Q2FY27 were revised up by 10 basis points each, to 4 per cent and 4.2 per cent, respectively. Although, the central bank attributed this largely to a sharp rise in precious metal prices.
Inflation risks may prove to be broader than what that explanation implies.
Three factors merit attention. First, global weather models are increasingly flagging the risk of El Niño conditions developing in 2026. For India, this typically translates into uneven monsoon outcomes. Perishables — especially vegetables, which have been a major source of recent disinflation — could in such a scenario, quickly turn from a drag into a driver of headline inflation.
Second, global commodity dynamics are shifting. Since November, the World Bank’s base metals and minerals index has risen by 15 per cent. Any escalation in geopolitical tensions or supply disruptions could amplify this trend, raising input costs for Indian manufacturers. If demand continues to hold up, pass-through to retail prices could be faster than in the recent past. From a business cycle perspective, as accommodative monetary and fiscal settings over the last year work through the system with lags, inflationary pressures could build up as demand firms.
Third, base effects are set to turn less favourable in the second half of 2026. Compounding this is the forthcoming revision to the CPI series, due on February 12, which will involve changes in base year, weights and the measurement of certain sub-indices such as housing rent. Our estimates suggest this alone could mechanically lift measured inflation by around 20 basis points.
Against this backdrop, the current pause may well mark the end of the rate-cut cycle, with the terminal repo rate settling near 5.25 per cent — unless global shocks significantly undercut growth. It is true that after several months of sub-2 per cent inflation, a gradual re-alignment higher can be argued to be desirable. Moderately higher inflation supports nominal GDP growth, corporate earnings, wage growth and the fiscal arithmetic.
Where monetary policy now matters most is liquidity. The RBI has injected close to ₹13 trillion of durable liquidity so far in FY26. Yet banking system liquidity has remained intermittently tight, weighed down by forex intervention, high currency in circulation and uneven government spending. Transmission has therefore been incomplete: weighted average lending rates on fresh loans are down 105 basis points and term deposit rates by 95 basis points, against cumulative repo cuts of 125 basis points.
Recent injections have helped. Durable liquidity is estimated at around ₹5 trillion as of January, easing near-term pressures. But the task is not done. For FY27, sustaining transmission will require reserve money growth — currently around 9 per cent — to realign with nominal GDP growth, which may exceed the Budget’s 10 per cent assumption.
Moreover, while the rupee has stabilised following the US-India trade deal, one cannot be complacent about the rupee and need for further support to curtail volatility could remain alive. Recent global selloffs across equities, crypto assets and precious metals underline how fragile global sentiment remains. As India heads into 2026, caution and agility will be as important as conviction.
In that sense, the RBI’s decision and communication strike the right balance: confident on domestic fundamentals, alert to inflation risks, and appropriately wary of an unpredictable global environment.
The author is principal economist at HDFC Bank. Views are personal.
 "Sakshi Gupta, Principal Economist, HDFC Bank")