A Goldilocks Pause: RBI Holds Repo Rate, Watches For The Three Bears

The decision by the Monetary Policy Committee (MPC) is the first after the Union Budget and will impact market sentiment, interest rates, and liquidity conditions. The previous bi-monthly meeting in December 2025 saw a 25 basis point drop. 

The policy signal also matters for the NDA 3.0 government, which has positioned domestic consumption as a key growth driver amid weak global demand. 

From Pause To Easing

Two days before the Narendra Modi-led NDA government began its third term on 9 June 2024, the RBI held its streak of continuity, maintaining the repo rate at 6.50% for the eighth time. The rate remained unchanged through most of 2024, before beginning an easing cycle in early 2025. 

The central bank has since delivered four rate cuts totalling 125 basis points or 1.25%, bringing the policy rate down to 5.25%. 

While the pause phase was overseen by former governor Shaktikanta Das, who now holds the post of Principal Secretary, PMO, all the subsequent rate cuts — and the current hold — have come under Governor Sanjay Malhotra who took charge in December 2024. 

Lower inflation will enhance households’ disposable income and increase their purchasing power, and this approach would support consumption and investment demand.

 

— Shaktikanta Das, Principal Secretary, PMO & ex-Governor, RBI (December 2024)

This philosophy underscores a longstanding focus on how anchored inflation expectations help sustain consumption-led growth, a theme that aligns with broader economic priorities under the NDA 3.0 government’s emphasis on strengthening domestic demand.

“Amidst heightened geo-political tensions and elevated uncertainty, the Indian economy is in a good spot with strong growth and low inflation. Inflation remains below the tolerance band and its outlook continues to be benign,” Sanjay Malhotra, Governor, RBI said in his statement. 

'Goldilocks' And The 3 Bears

A constant repo rate signals confidence in the economy, a “Goldilocks” period, if you will, of not too hot (inflationary) and not too cold (slowing growth) using the Finance Ministry’s analogy from last May. Macroeconomic conditions are still ‘just right’. 

But, it also means that the central bank is in a wait-and-watch mode as it tracks three key downside risks: a potential slowdown in global growth amid geopolitical tensions, volatility in commodity and precious metal prices that could push inflation higher, and uneven transmission of lower interest rates to domestic consumption. 

“With FY2026 CPI inflation projected at a low 2.1% and underlying pressures well contained, the policy pause suggests that the current rate setting is appropriately calibrated to support demand without jeopardising price stability,” Vikrant Chaturvedi, Associate Director, Research, Brickwork Ratings said. 

According to the latest Economic Survey, the average headline inflation from April-December 2025, was the lowest recorded, at 1.7%, since the beginning of the CPI series launched in 2011–12. It was primarily attributed to the general disinflationary trend in food and fuel prices, which together account for 52.7% of India’s Consumer Price Index (CPI) basket.

“The MPC’s upward revision to its GDP growth projections for early FY2027 to 6.9 percent in Q1 and 7.0 percent in Q2, underscores the strength of domestic growth drivers, particularly services, investment and consumption,” Chaturvedi added. 

Against a backdrop of exceptionally low realised inflation, the RBI revised its CPI inflation outlook for the period ahead, nudging it up from its earlier expectation of around 3.9% for Q1 of FY 2026–27. The revised projections place CPI inflation at 4% in Q1 of FY2026–27 and 4.2% in Q2, compared to slightly lower estimates in the December policy.

Malhotra explained that the slight revision upwards for inflation outlook was mostly because of the hike in precious metals. They make up 60-70 basis points. But, underlying inflation remains low. 

For now, the economy looks ‘just right’, but the RBI is keeping a close watch on the bears.