With inflation inching back towards the Reserve Bank of India’s (RBI) 4% target and economic growth holding firm, all the 10 economists polled by FE unanimously expect the central bank to hold policy rates and maintain a neutral stance in the February monetary policy meeting.
The focus, they say, is likely to shift towards liquidity management and transmission, particularly after the Union Budget delivered a negative surprise on government borrowing. The Monetary Policy Committee (MPC) will share its outcome on Friday.
The government’s higher-than-expected gross market borrowing of Rs 17.2 lakh crore has weighed on bond market sentiment, pushing yields higher in the near term. Economists, however, believe RBI liquidity support could help cushion the impact, reinforcing expectations that non-rate tools will take centre stage in the upcoming policy.
What do economists say?
Most economists see little urgency for a rate cut at this stage, citing resilient growth momentum and evolving inflation dynamics. Gaura Sengupta, chief economist at IDFC First Bank, said the economy is expected to grow 7.4% in FY26, while inflation is projected to rise back to 4% due to base effects.
“Hence there is no need for a rate cut,” she said, adding that, however, liquidity infusion is required and likely to be the focus in the February policy and in FY27.
ICICI Bank’s chief economist Sameer Narang said the policy narrative has shifted decisively towards communication and transmission, with elevated deposit costs constraining banks’ ability to transmit reduction in policy rates. “True transmission will occur only once deposit costs ease, which requires sufficient liquidity,” he said.
The system liquidity has fallen to Rs 66,000 crore in January and Rs 72,000 crore in December compared to Rs 1.78 lakh crore in November. This is sharply below the 1% of net demand and time liabilities (NDTL), the level the RBI is comfortable at.
Indranil Pan on government’s borrowing programme
YES Bank chief economist Indranil Pan said the government’s borrowing programme does not directly influence the monetary policy stance, which remains guided by inflation and growth dynamics. However, as the government’s debt manager, the RBI has multiple tools to manage the impact of large borrowings on liquidity and bond markets.
One such option is switch operations, wherein government securities maturing with the RBI can be exchanged for longer-dated bonds, easing redemption pressure. “Nearly Rs 1 lakh crore of securities held by the RBI mature next year. These can be switched into longer-duration papers to reduce pressure on gross borrowing,” Pan said.
The central bank could also conduct security switches with the market and open market operations (OMOs) to smoothen yields. If the RBI allows its balance sheet to expand, it could step up OMOs beyond forex-related operations, helping absorb excess bond supply.
The RBI has infused Rs 4.4 lakh crore through bond purchases and forex swaps since December. Pan added that the higher issuance of short-term securities — pegged at Rs 1.3 lakh crore in the Budget compared to zero last year — already reflects efforts to manage borrowing pressures more efficiently.
The widening gap between credit and deposit growth has emerged as a key concern for policymakers. While loan demand remains robust, driven by healthy economic activity, deposit growth has lagged, tightening systemic liquidity and complicating transmission.
Against this backdrop, economists expect the RBI to lean more heavily on liquidity measures rather than rate action, at least until clearer signals emerge from the new GDP and inflation series due this month.
According to Madan Sabnavis, chief economist at Bank of Baroda, credit growth outpaces deposits and will likely continue amid a strong economy boosting credit demand, while deposits lag. He added that the RBI must provide liquidity—possibly via a cash reserve ratio (CRR) cut, which could release Rs 2.5 lakh crore for a 1% reduction.
“Banks need to have surplus securities to sell to the RBI in the OMO. Due to LCR (liquidity coverage ratio) requirements, the 18% SLR (statutory liquidity ratio) isn’t enough—banks need 24-25%. If already at that level, it would limit selling from banks at bond purchases by the RBI, as it risks LCR compliance. A CRR cut avoids this issue entirely, with no securities dependency,” said Sabnavis.