The Reserve Bank of India is scheduled to announce its key rate decision tomorrow, February 6.
The 6-member Monetary Policy Committee meeting started on February 4, and the members began deliberations on the road ahead for interest rate policy.
The interest rate decision is a function of several factors-
1) Union Budget announcements on February 1. The Govt announced significantly higher capex allocation but market borrowing increased. All of these factors are set to impact RBI’s outlook for FY27.
2. US slashing the tariff rate on India. This boosted sentiment across asset classes on third February.
3) Rupee’s strength after the dollar is expected to strengthen.
Here are key things to watch out for-
1. RBI likely to stay on pause with mildly dovish guidance: Kotak Mahindra AMC
Kotak Mahindra AMC expects RBI to pause. “The committee is expected to maintain the repo rate unchanged at 5.25%; however, forward guidance is likely to remain mildly dovish, underscoring a data‑dependent stance and preserving flexibility for recalibration should the growth–inflation trade‑off evolve,” said Deepak Agrawal, of CIO – Debt, Kotak Mahindra AMC.
The repo rate is widely expected to stay unchanged at 5.25% as the MPC has already cut repo rate four times since the previous February meet to the latest December meet. In February 2025, the MPC unanimously lowered the repo rate by 0.25% followed by another 0.25% cut in the April meeting and a sharper 0.5% reduction in June. The committee then chose to pause in both the August and October meet before cutting the rate once more in the December meeting by 0.25%.
This totalled to the decline in repo rate to 5.25% in December from 6.25% in February
The government has tasked the RBI to ensure consumer price index (CPI)-based retail inflation remains at 4% with a margin of 2% on either side.
2. RBI may pause on the back of favourable external factors: Emkay
Even as global macro and market narratives continue to swing, Emkay believes that RBI may opt for a pause. They pointed out that “monetary transmission, however, remains weak despite a fairly deep easing cycle and sustained liquidity infusion, and continues to be the key policy constraint.”
The Emkay report also highlighted that they expect “system liquidity to ease to Rs 2.4 trillion by March end from Rs 200 bn as of end-Dec-2025.”
This they believe would be “limiting the need for more RBI infusion.”
However, they will watch for possible “regulatory changes for banks to ease bank capital constraints and improve credit availability.”
3. Stronger rupee may give RBI room to inject durable liquidity: Kotak AMC
According to a report by Reuters, Indian lenders are pushing the RBI to change its liquidity regulations to ease a deposit shortfall amid rising bond yields, five treasury officials said. Agrawal of Kotak AMC noted that recovering rupee will give RBI enough room to release adequate durable liquidity. “Tariff reduction by the US, EU-India FTA deal etc would ease pressure on the INR, giving the RBI enough room to release adequate durable liquidity to keep system surplus on durable basis — something that had been constrained in the recent past,” he said.
Overall the expectation is biased more towards a pause rather than another round of cut. All eyes on the RBI Governor’s speech at 10 am tomorrow.
We will get you live coverage on Financialexpress.com .