RBI Set to Hold Rates as Focus Shifts to Policy Transmission

India’s central bank is widely expected to pause interest rates this week, marking a pivotal moment for monetary policy as the economy steadies and external risks ease. Instead of cutting rates further, the Reserve Bank of India (RBI) is now under pressure to ensure that earlier policy easing actually reaches businesses and consumers.

A newly announced U.S.–India trade agreement has also reduced immediate growth concerns, giving policymakers more room to prioritize stability over stimulus.

RBI Likely to Stay Put on Rates

The Reserve Bank of India is expected to keep its benchmark policy rate unchanged when it announces its decision on Friday. Most economists see little urgency for further easing, especially after a series of aggressive rate cuts over the past year.

In a Reuters poll conducted before the trade deal was announced earlier this week, 59 out of 70 economists predicted the RBI would maintain the status quo. A smaller group had argued for another cut, citing subdued inflation and fears that U.S. tariffs could disrupt India’s growth momentum.

Those concerns have now softened.

A Year of Aggressive Easing Already Done

Since February last year, the RBI has slashed interest rates by a cumulative 125 basis points, bringing the repo rate down to 5.25%. These moves were designed to support economic activity amid global uncertainty and cooling domestic demand.

However, the effectiveness of those cuts has been uneven. While policy rates have fallen sharply, borrowing costs across the economy have not declined to the same extent, limiting the intended boost to investment and consumption.

That gap is now a central concern for policymakers.

Trade Deal Eases Pressure on the Central Bank

The U.S.–India trade agreement announced on Monday has reduced the need for immediate monetary support, economists say. The deal has helped calm fears of trade disruptions and improved sentiment around India’s economic outlook.

“The U.S.–India trade deal strengthens the argument for the RBI to remain on hold this week,” said Dhiraj Nim, an economist at ANZ Bank.

With growth holding close to its long-term potential and inflation expected to rise gradually toward the central bank’s target, Nim noted that a pause in policy is increasingly justified.

Growth Remains Strong, Inflation Contained

India’s economy continues to outperform many global peers. Gross domestic product is projected to grow by around 7.4% in the current financial year, according to economists, while the government’s chief economic adviser has forecast growth between 6.8% and 7.2% for the next fiscal year.

Inflation, meanwhile, has remained well below the RBI’s medium-term target. Consumer price inflation is expected to move higher but stay within comfortable limits.

At the December policy meeting, RBI Governor Sanjay Malhotra described the economy as being in a “Goldilocks phase” not too hot, not too cold. The central bank projected growth of 7.3% and inflation of around 2% for the fiscal year ending March 31.

Market Interventions Complicate Policy Transmission

Despite solid growth, the RBI has faced challenges in financial markets over recent months. Heavy foreign investor outflows from Indian equities forced the central bank to intervene in both currency and bond markets to stabilize conditions.

Between September and November, the RBI sold roughly $30 billion from its foreign exchange reserves, according to the latest available data. While these sales helped support the rupee, they also drained liquidity from the banking system.

That tightening effect has added stress to bond markets already grappling with record government borrowing.

Bond Yields Fail to Reflect Rate Cuts

One of the clearest signs of weak policy transmission has been the behavior of government bond yields. Despite significant rate cuts, the benchmark 10-year bond yield has barely declined over the past year.

This matters because the 10-year yield serves as a reference point for pricing loans across the economy, from bank credit to corporate borrowing. Elevated yields keep funding costs high, blunting the impact of easier monetary policy.

As a result, businesses and households have seen limited relief, even as headline rates have fallen sharply.

RBI’s New Challenge: Making Cuts Count

Economists say the central bank’s immediate task is no longer about cutting rates further, but about ensuring previous reductions are fully transmitted through the financial system.

“The key challenge is to prevent transmission from weakening while the RBI remains on an extended pause,” said Kaushik Das, chief economist for India, Malaysia, and South Asia at Deutsche Bank.

To address liquidity constraints, analysts expect the RBI to step up its open market bond purchases in the coming months.

Liquidity Support Likely Through Bond Purchases

Market participants anticipate that the central bank could buy at least 1 trillion rupees ($10.9 billion) worth of government bonds to ease liquidity pressures and support the bond market.

The need for such intervention has increased after the government announced a higher-than-expected gross borrowing program for the next fiscal year. Larger bond supply risks pushing yields higher unless demand is supported.

“Higher borrowing numbers mean bond supply concerns will continue to weigh on policy transmission,” economists at Nomura said in a recent note.

What Comes Next for Policy and Markets

With rates likely on hold, the RBI’s communication and liquidity operations will take center stage. Investors and economists will closely watch how the central bank balances inflation risks, growth resilience, and financial market stability.

Any signal of sustained bond purchases or liquidity injections could help ease borrowing costs and improve the effectiveness of past rate cuts.

At the same time, policymakers are expected to remain cautious, mindful of global volatility and the need to preserve financial buffers.

A Measured Pause, Not an End to Support

The RBI’s expected pause does not signal a shift toward tighter policy. Instead, it reflects confidence in India’s growth trajectory and a recognition that monetary easing works only if it reaches the real economy.

If liquidity improves and bond yields soften, the benefits of last year’s rate cuts may finally be felt more broadly.

For now, the central bank appears content to watch, fine-tune, and let the economy do the rest.

(With inputs from a Reuters report.)

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