India’s central bank kept policy rates unchanged on Friday, citing easing growth headwinds following recent trade deals with the European Union and the United States, while maintaining a neutral stance amid a benign inflation outlook.
The decision was announced after the Reserve Bank of India’s monetary policy committee (MPC) meeting, where members voted unanimously to hold rates at 5.25%.
Economists polled by Reuters had forecast the policy rate to remain unchanged.
“External headwinds have intensified, though the successful completion of trade deals augurs well” for overall economic outlook, said Sanjay Malhotra, governor of the Reserve Bank of India, explaining the pause in the easing cycle.
He added that in the near term, domestic inflation and growth outlook remain positive.
Policy pause and economic outlook
The RBI cut benchmark rates by a cumulative 125 basis points last year, and economists say attention will now shift to how effectively those reductions are transmitted through the financial system.
Malhotra said the MPC maintained a neutral stance after a detailed assessment of evolving macroeconomic conditions and the overall outlook.
According to India’s economic survey released days before the US-India trade deal announcement, the economy is expected to grow by 7.4% in the fiscal year ending March 2026, and between 6.8% and 7.2% the following year, keeping India on track as the world’s fastest-growing large economy.
On inflation, the RBI has limited concerns. Consumer inflation rose to 1.33% in December, up slightly from 0.71% in the prior month.
The central bank projects CPI inflation for 2025–26 at 2.1%.
Trade deals ease external risks
The policy decision followed progress on trade negotiations.
Earlier this week, US President Donald Trump announced that Washington would cut tariffs on Indian exports to 18%, easing concerns flagged by the RBI at its previous meeting.
The US had levied tariffs of up to 50% on Indian exports, among the highest across countries and higher than those imposed on China, straining ties between New Delhi and Washington.
The tariff reduction has helped alleviate external headwinds to growth, according to policymakers.
Markets, liquidity and rate transmission
Analysts at Goldman Sachs see the RBI signaling a “lower for longer” rate environment.
Santanu Sengupta, chief India economist at Goldman Sachs, told CNBC’s “Inside India” that the central bank will likely hold rates for at least a year, adding there was an “outside chance of a rate cut,” had the US-India trade deal not gone through.
Sengupta said the RBI will focus on rate transmission, noting that long-term bond yields are “unlikely to come off” as banks and insurance companies taper purchases of long-dated government securities while supply rises.
India plans to borrow ₹17.2 lakh crore ($187 billion) in the financial year starting April 1, an 18% increase from the revised estimate for the financial year 2026 and above market expectations.
The RBI also shared its assessment of liquidity and bond markets, saying system liquidity averaged ₹75,000 crore daily after steps taken in December and January.
“G-sec yields continued to harden over last eight months, mirroring global trends,” Malhotra said, adding that the central bank would remain proactively engaged in liquidity management to meet the productive requirements of the economy.
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