RBI seen holding rates in February MPC as global uncertainty persists, says SBI Research

The Reserve Bank of India (RBI) is widely expected to pause on interest rates at its February 4-6 Monetary Policy Committee (MPC) meeting, maintaining the current stance despite substantial easing already delivered. SBI Research has explicitly flagged the February policy as one headed for status quo, citing elevated global uncertainty and uneven transmission of past monetary actions. Despite cumulative repo rate cuts of 125 basis points and record liquidity infusion, bond yields have remained sticky, suggesting diminishing marginal returns from further rate action at this stage.

Global uncertainty vs trade deals

The policy pause comes even as India benefits from a major external tailwind. Recent India-US and India-EU trade agreements have reduced tariffs on Indian exports to 18% from 50%, restoring export competitiveness and placing India among the lowest-tariff Asian economies. However, SBI’s Geo-Economics Stress Index indicates that global uncertainty continues to remain high, with stress typically transmitting into real economic activity with a lag of three to four months. This delayed impact strengthens the case for policy caution rather than premature easing.

Beyond these two central factors, several other macro signals reinforce expectations of a steady policy outcome.

On the inflation front, the near-term outlook is complicated by the transition to a new CPI base year (2024). While food inflation has remained in negative territory for multiple months, SBI estimates that headline CPI could see a marginal upward shift of 20–30 basis points under the new weighting structure on unchanged indices. This statistical rebalancing, even if not demand-driven, limits the RBI’s comfort on inflation optics ahead of FY27.

Liquidity conditions

Meanwhile, liquidity conditions have eased materially, with the banking system returning to surplus since late December 2025. Average surplus liquidity stood at around Rs 0.6 lakh crore in January and has further expanded in February. In total, the RBI has injected nearly Rs 6.6 lakh crore through open market operations (OMOs), CRR cuts, term repos and swaps during the current fiscal. Yet, despite this unprecedented infusion, government bond yields have hardened, highlighting frictions in monetary transmission.

SBI Research points to the structure and choice of OMO securities as a potential reason for this disconnect. It argues that liquidity-only interventions may not be sufficient in the current environment and that a more targeted or duration-supportive OMO approach could be required to ease long-term yields without altering the policy rate.

Rupee volatility

Currency dynamics are emerging as a critical constraint for the RBI ahead of the February policy. The rupee has see-sawed in a wide Rs 89–92 per dollar band over the past two months, reflecting global risk aversion and heightened offshore activity. Since April 2, 2025, when the US announced sweeping tariff hikes across economies, the Indian rupee has depreciated 5.8% against the US dollar, making it the most depreciated currency among major economies, according to SBI Research.

While the rupee staged a sharp recovery of over Rs 1 following the India–US trade deal that cut tariffs on Indian exports to 18%, the relief proved temporary. SBI Research notes that although the rupee is the most depreciated, it is not the most volatile, suggesting persistent directional pressure rather than episodic stress. Enhanced offshore trading in the non-deliverable forward (NDF) market has further amplified intraday swings and played a larger role in price discovery during periods of thin onshore liquidity.

Forward market indicators point to continued pressure. Interbank forward premia are hovering around 2.5% across the 1-, 3- and 6-month tenors from mid-January 2026, signalling expectations of further depreciation. Notably, the six-month premia are lower than the three-month premia, indicating near-term stress while longer-dated expectations remain relatively more anchored.

Globally, the research noted monetary policy has entered a pause phase, with most central banks opting to wait despite growing expectations of US Federal Reserve rate cuts later in 2026. In this context, the RBI appears inclined to conserve policy space, monitor transmission, and rely more on liquidity and communication tools rather than headline rate changes.

Taken together, the balance of risks suggests that the February MPC meeting will prioritise stability over stimulus, reinforcing the message that policy effectiveness now hinges more on transmission mechanics than additional rate cuts.