What to expect from February 2026 RBI Monetary Policy

5 Feb 2026 , 05:51 PM

Summary –

The RBI monetary policy comes just after the budget presentation and the Indo-US trade deal being signed. While the budget would be fully factored into monetary policy calculations, one cannot be too sure if the Indo-US trade deal will also be factored in. To cut or not to cut rates will be an intense debate and it is hard to second-guess what the RBI MPC members have in mind. However, liquidity will be a big issue for the MPC. Of course, inflation and GDP growth estimates are likely to maintain the status quo!

 

TWO IMPORTANT FACTORS INFLUENCING THE FEB-26 MONETARY POLICY

Ahead of the upcoming Monetary Policy Committee (MPC) meeting commencing from 04th February, the RBI Governor is all set to announce the policy on 6th February, and there are two important developments to keep in mind. 

The first factor is the Union Budget of India – presented by the Finance Minister – Nirmala Sitharaman on 1st February. It is predicted that the central bank will consider the budget and accordingly frame the policy. The Budget has projected nominal GDP growth of 10.2% and significantly higher total borrowings of ₹17.2 trillion for FY27. This higher borrowing may lead to increased issuance of Treasury Bills. 

The second key development is the confirmation of a trade deal between India and the US by President Trump and Prime Minister Modi. Under this deal, tariffs have been reduced from 50% to 18% with immediate effect. This includes the removal of the 25% penalty related to India’s purchase of Russian oil and a cut in the base tariff from 25% to 18%. This agreement is expected to support economic growth by boosting exports.

In addition, the Union Budget has placed strong emphasis on driving economic growth, which would require sufficient liquidity and lower interest rates. These factors are likely to influence the RBI’s policy stance. 

RECAP OF KEY ANNOUNCEMENTS OF DEC-25 MONETARY POLICY

Before we divulge into the expectations from the RBI, let us quickly glance through the key highlights of the December 2025 policy statement.

• RBI MPC cut the repo rates by 25 bps from 5.50% to 5.25%. Thus, the SDF rate stood reduced to 5.00% and bank rate / MSF rate was lowered to 5.50%.
  
• The FY26 GDP growth estimate was hiked by 50 bps to 7.3%; a hike of 80 bps in the last 2 policies. This appears in-line with the Q1 and Q2 GDP growth averaging at 8.0%.
  
• The December policy cut CPI inflation estimate for FY26 by another 60 bps to 2.0%; taking the total inflation downgrade to 280 bps since February 2025.
  
• The stance of monetary policy was held at Neutral. Prof Ram Singh was the only member to give a dissenting vote; calling for the stance to be shifted to “accommodative.”
  
• To infuse liquidity into the system, the RBI had agreed to take up a combination of open market operations (OMOs) and forex swaps.

Against this backdrop, let’s explore the critical questions and how the RBI policy may shape the answers.

1. WILL THE RBI CUT ANOTHER 25 BPS OR HOLD STATUS QUO IN FEBRUARY 2026

   In December, the 25-bps rate cut was along expected lines as the nominal GDP growth for Q2FY26 had come in lower than expected at 8.3%. However, the story is different in February. Inflation is expected to move higher as the new CPI will assign a 900 bps lower weightage to food basket. Also, the MOSPI has projected 7.4% real GDP growth for FY26, while for FY27, even the nominal GDP growth estimates are higher at 10.0%. Hence, most market participants are of the view that the RBI may abstain from rate cuts in Feb-26.

   Let us for a moment play the devil’s advocate. If you combine the two important influencing factors (the Union Budget and the Indo-US trade deal), the message is that there could be a revival in growth. Hence an environment that facilitates such growth is essential at this point of time. Also, bond yields have been elevated due to selling in bonds after Bloomberg deferred the inclusion of Indian bonds in the CGAI index. The government will also need lower bond yields to fund its ₹17.2 Trillion gross borrowing program. All of these considered together, the need to support growth, manage elevated bond yields, and facilitate smooth government borrowing creates a strong case for the RBI to consider a 25 bps repo rate cut, making such a move a realistic possibility. 

2. WILL THE RBI CHANGE ITS STANCE TO “ACCOMMODATIVE” IN FEB-26?

   In October there were 2 dissent votes calling for changing the stance to “Accommodative”, and in December, there was 1 dissent vote to shift the stance. However, the MPC voted to keep it as neutral. There are two possibilities. The RBI may choose to cut rates by 25 bps and also shift the stance to accommodative. That would be a dual signal to the markets. Alternatively, the RBI may hold on rates in February and just change the stance to “Accommodative” to give a signal that the RBI stands ready to support. Overall, a change in stance from Neutral to Accommodative looks like a strong possibility in Feb-26.

3. WILL THE RBI CHANGE ITS FY26 REAL GDP GROWTH ESTIMATES?

   In the previous MPC meeting in December 2025, the RBI had raised the GDP growth estimate from 6.8% to 7.3% for FY26. In the first half of FY26, the real GDP growth has been 8.0%. The real growth looks reasonable as inflation may pick up due to the change in food weightage and that would expand the GDP deflator. Hence, real GDP growth would face some pressure. Also, the Indo-US trade deal has just been closed and the impact may take about 2-3 months to show up, by which time FY26 will be done and dusted. Hence, the growth impact of the Indo-US trade deal will only be visible in FY27. Considering these factors, the RBI may choose to maintain the real GDP growth estimates for FY26 at 7.3%. The message of robust growth has already been sent out to the market, and may not need further emphasis.

4. WILL FY26 INFLATION ESTIMATES BE LOWERED FROM 2.0%?

   A further cut in inflation estimates now looks unlikely. To put this in perspective, the RBI has already reduced its FY26 inflation forecast from 4.8% to 2.0% between February and December 2025. The average CPI inflation for the nine months up to December 2026 is already at a low 1.7%, which means inflation is broadly tracking the RBI’s projections.
   Also, the recent reduction in the weight of food items in the CPI basket by over 900 basis points could push inflation higher, since food prices were earlier helping keep overall inflation low. Given these factors, the RBI may prefer to take a wait-and-watch approach and avoid further cuts to its FY26 inflation estimates for now.

5. LIQUIDITY QUESTION – WILL THE RBI CUT CRR BY ANOTHER 100 BPS?

   The RBI cutting CRR by another 100 BPS may sound bold, but is a real possibility. Let’s understand why. 

   Since December 2025, the RBI has already injected about ₹4.40 trillion of liquidity into the system through open market operations (OMOs) and forex swaps. Given the signals from the Union Budget, there could be further liquidity support ahead. Over the past two months, system liquidity has remained well below the RBI’s comfort level of 1% of net demand and time liabilities (NDTL). This raises the key question of how the RBI plans to add more liquidity.
   
   At the same time, the gap between bank credit and deposits has widened. Because of liquidity coverage ratio requirements, banks are effectively holding more than the minimum 18% SLR, which tightens liquidity further. One straightforward option for the RBI would be to cut the cash reserve ratio by 100 basis points to 2.0%. This move would immediately release around ₹2.5 lakh crore of liquidity into the system. The main question, however, is whether the RBI would be comfortable with a CRR level as low as 2.0%.

 

The 3-day MPC commencing on 04-Feb will have an intense debate on whether or not to cut rates. It is not going to be a simple decision. Equally complex will be how the RBI infuses liquidity into the system.  One has to await the outcome on 06-February for the final word!