RBI likely to pause on rates in February policy as liquidity takes centre stage

A Mint poll of 10 economists shows nine expecting a pause at 5.25%, while one anticipates a 25-basis-points (bps) cut to 5.00%. One basis point is a hundredth of a percentage point.

The MPC is scheduled to announce its policy decision after its 4-6 February meeting. The central bank is also expected to maintain its ‘neutral’ stance, which allows it to move in either direction.

However, liquidity measures may take centre stage this time, as systemic liquidity remains low, with the government cash surplus high and the drain from FX intervention persisting.

In 2025, the MPC had cumulatively cut the policy repo rate by 125 bps, including a 25 bps cut in December.

“We expect the RBI to remain on pause in February," said Gaura Sengupta, chief economist at IDFC FIRST Bank. “Inflation in FY27 is expected to average at 4%, which is the monetary policy target. Growth is showing signs of becoming broad-based, with a pickup in rural and urban consumption."

The broad consensus is that while inflation remains benign and close to the RBI’s 4% target, improving growth momentum, pressures on the rupee, and weak transmission of past rate cuts have sharply narrowed the space for further easing.

“This marks the end of the rate-cut cycle," Sakshi Gupta, principal economist at HDFC Bank, said. “Growth is picking up, inflation is likely to gradually align back to 4%, therefore limiting space for further monetary action."

The bank expects no change in the MPC’s neutral stance and said the higher government borrowing programme announced in the budget on Sunday and the India-US trade deal on Monday are unlikely to influence Friday’s decision.

While the trade deal may ease near-term pressure on the rupee and reduce RBI’s need to intervene in currency markets, economists do not expect a major impact on government bond yields or monetary policy.

“The majority of the cuts are behind us. Domestic growth indicators are very strong," Sengupta said, noting that India’s growth is expected to remain above 7.6% despite global uncertainties.

Liquidity overhang

A key concern for the MPC this time is liquidity rather than rates. On 22 January, Mint exclusively reported that in a pre-policy interaction with RBI, economists and market participants converged on one message: the central bank should focus on easing liquidity in the banking system rather than cutting rates.

Among the suggestions, the strongest consensus favoured the continued use of open market operations (OMOs) and dollar buy-sell swaps. As of 2 February, liquidity in the banking system was in surplus of ₹1.7 trillion.

Despite multiple OMOs and FX swaps since December, systemic liquidity remains under pressure, driven by RBI’s intervention in the foreign exchange market and a widening gap between credit and deposit growth.

“Banks’ credit-to-deposit ratios remain at historical highs," Sengupta said, adding that this has created pressure in money markets, with a rise in rates of certificates of deposit.

As deposit growth is lagging credit growth, RBI’s liquidity infusion will remain key for the next several months to give comfort to market participants and as long as foreign capital flows are not picking up and RBI’s FX intervention is causing a liquidity drain, OMOs will need to be conducted in size to ensure that reserve money growth does not fall sharply, Deutsche Bank said.

“Based on our liquidity calculations, we expect another ₹2 trillion of OMO purchases to be conducted in the remaining part of this fiscal year, with possibly an additional ₹4 trillion in the first quarter of FY27," the bank said in a research note dated 28 January.

However, a temporary 1% cut in the cash reserve ratio (CRR) is also expected if liquidity pressures persist.

“While RBI will continue with OMOs, there could be a stage where, because of the LCR (liquidity coverage ratio) requirements, banks may not be willing to sell those securities, and I think that a possibility of a CRR cut is probably there right now," Madan Sabnavis, chief economist at Bank of Baroda, said.

In June 2025, the central bank cut CRR by 1%, phased it in four equal tranches till November, lowering it to 3% from 4%, and injected ₹2.5 trillion.

Inflation-growth dynamics

Several economists noted that the MPC is also likely to wait for greater clarity from the new consumer price index (CPI) series, scheduled for release on 12 February, before altering its policy stance.

Japanese bank Nomura said it does not expect RBI to react sharply to any technical upward revisions to inflation under the new series.

Most economists expect RBI to retain its existing inflation and gross domestic product (GDP) projections, citing the impending release of the new CPI and GDP series and a preference for data dependency.

Deutsche Bank said that a new CPI series could lower the historical CPI outturn and forecasts by about 10-20 bps, as the weights of food items are likely to be lowered to about 41% from 46% currently.

The foreign bank expects the RBI’s current CPI inflation forecast for FY26 to remain unchanged at 2.0% but has estimated that the January-March quarter projection of 2.9% will likely be marked down by 20-30 bps. For FY27, it expects RBI to maintain its CPI forecast at 4.5%, the research note dated 28 January said.