With the policy repo rate left unchanged at 5.25% and the stance retained at “neutral”, the Monetary Policy Committee (MPC) has clearly signalled a prolonged pause—if not the end—of the rate-cutting cycle. Reserve Bank of India (RBI) Governor Sanjay Malhotra indicated that rates are likely to remain at current levels over the next nine to twelve months. The rationale is straightforward. Growth momentum remains intact and is likely to receive an additional boost from the India-US trade deal now in the works, the finer details of which is expected any day now, and the India-EU pact already concluded.
The Union Budget has also lent support, with fiscal consolidation limited and capital expenditure pegged at a hefty Rs 12.2 lakh crore. A long pause would be in alignment with several Asian central banks, including South Korea and Indonesia, which have signaled pauses in their easing cycles amid inflation concerns and external pressures. The uptick in commodity prices and weaker currency may also pose upside risks to inflation. The RBI has retained its GDP growth forecast for the current year at 7.4% and raised its estimate for the first half of FY27 to 7% from 6.8%—a projection that comes even ahead of the release of the new GDP and inflation data series later this month.
Growth Buoyancy
Having cut the repo rate by a cumulative 125 basis points (bps), and with transmission to lending rates progressing reasonably well—loan rates had fallen by around 100 bps till December — the central bank sees little immediate need for further stimulus. Inflation, meanwhile, remains benign, especially after stripping out the impact of precious metals, though it is expected to edge up next year, to 3.2% in the fourth quarter of FY26 and to a little over 4% in the first half of FY27. Bond markets, however, appeared unsettled.
The 10-year benchmark yield rose sharply to 6.7363% on Friday, up nine bps, largely reflecting disappointment over the absence of a clearly articulated liquidity infusion plan. Malhotra attributed part of the rise to hardening global yields but reiterated that the RBI would remain pre-emptive and proactive in managing liquidity. The central bank, he said, would factor in swings in government cash balances, currency in circulation, and foreign exchange interventions to ensure smooth transmission across markets.
Bond Market Friction
In any case, the RBI has already injected durable liquidity of nearly Rs 18 lakh crore since December 2024 through open market operations, buy-sell swaps, and a cut in the cash reserve ratio. System liquidity currently stands at a comfortable surplus of about Rs 3.5 lakh crore and is expected to remain so through March, barring significant rupee absorption through forex operations. Despite these assurances, markets remain wary of the large supply of government securities expected next year.
While the Centre’s net borrowing of Rs 11.73 lakh crore for FY27 is only marginally higher than this year’s level, combined borrowings of the Centre and states could rise by about Rs 80,000 crore, according to some estimates. These concerns may be overstated. As trade deals near completion, sentiment could improve and foreign portfolio inflows return, easing pressure on the RBI to supply dollars. For now, markets appear reluctant to bet on that outcome. They may yet have to. Interest rates alone do not drive investment—demand visibility does. But the cost of money matters greatly for small businesses, and keeping it in check remains essential if growth is to be broad-based and durable.