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India’s central bank has decided to keep its benchmark policy rate unchanged at 5.25%, signaling a pause in its easing cycle as improving global trade ties and resilient domestic fundamentals support the outlook for the world’s fastest-growing major economy.

The decision was widely expected. Economists surveyed ahead of the meeting had largely projected no change in rates, following a cumulative 125 basis points of cuts delivered over 2025. With those reductions now in place, policymakers are turning their attention to ensuring that cheaper borrowing costs flow through to businesses and households.

Reserve Bank of India Governor Sanjay Malhotra said the institution is navigating a more complex global backdrop but sees encouraging signs ahead, particularly from recently concluded trade agreements.

Why the RBI Is Pressing Pause

Explaining the decision, Malhotra noted that external risks remain elevated, yet successful trade negotiations with major partners have materially improved India’s medium-term prospects.

In particular, agreements with the United States and the European Union are expected to boost exports, investment inflows, and manufacturing activity. The U.S. recently announced a sharp reduction in tariffs on Indian goods to 18%, reversing earlier duties that had climbed as high as 50% on some exports. That rollback removes a significant drag on trade and helps stabilize India’s external demand outlook.

Domestically, the RBI remains comfortable with both growth and inflation trends in the near term. According to Malhotra, the central bank’s guidance is intentionally balanced, reflecting confidence in the economy while leaving room to respond if conditions change.

Radhika Rao, senior economist at DBS Bank Singapore, said the tone of the policy statement suggests a prolonged pause is likely, giving policymakers time to assess how earlier rate cuts feed into credit growth and consumption.

From Rate Cuts to Rate Transmission

After cutting interest rates by a total of 125 basis points last year, the RBI’s priority is now monetary transmission, ensuring banks pass on lower rates to borrowers.

To support this process, Malhotra emphasized that the central bank will remain proactive in managing liquidity and will ensure adequate funds in the banking system to meet the productive needs of the economy. That includes the potential use of open market operations over the current and upcoming quarters to smooth liquidity conditions.

Goldman Sachs’ chief India economist Santanu Sengupta expects the RBI to keep rates on hold for at least the next year, noting that an additional cut would likely have been considered only if the U.S.–India trade deal had failed to materialize.

Bond market dynamics are also influencing policy strategy. Long-term yields are expected to stay relatively firm as banks and insurers gradually reduce purchases of government securities while overall bond supply rises.

Government Borrowing and Market Impact

Adding another layer to the outlook is India’s expanding borrowing program.

Finance Minister Nirmala Sitharaman announced that the government plans to borrow 17.2 trillion rupees (approximately $187 billion) in the financial year beginning April 1. This represents an 18% increase from the revised estimate for the previous fiscal year and came in above market expectations.

Higher borrowing typically puts upward pressure on long-dated bond yields, which in turn can limit how much relief lower policy rates provide to long-term borrowers. As a result, economists expect the RBI to rely more heavily on liquidity tools rather than further rate cuts to support growth.

Growth Forecasts Keep India in the Global Lead

India’s macroeconomic outlook remains among the strongest worldwide.

According to the government’s latest economic survey, GDP is projected to expand by 7.4% in the fiscal year ending March 2026, followed by growth of between 6.8% and 7.2% the year after. These figures keep India firmly on track to retain its position as the fastest-growing large economy.

Key drivers include rising infrastructure spending, steady consumer demand, strong services exports, and increasing interest from global manufacturers seeking to diversify supply chains.

The RBI’s own assessment aligns closely with these projections, with policymakers pointing to positive momentum across multiple sectors, including construction, digital services, and industrial production.

Inflation Remains Well Contained

On the price front, the central bank has little immediate cause for concern.

Consumer inflation edged up to 1.33% in December from 0.71% in the previous month, remaining far below the RBI’s medium-term target. For the current financial year, the central bank now expects average inflation of around 2.1%, only slightly higher than its earlier 2.0% estimate.

Food supply conditions are described as favorable, helped by stable agricultural output and improving logistics. The RBI also indicated that core inflation, excluding volatile components such as precious metals, is expected to stay within a comfortable range.

This low-inflation environment gives policymakers flexibility to prioritize growth while maintaining price stability.

What Comes Next

With policy rates on hold, trade tensions easing, and growth forecasts comfortably above 7%, India enters the next phase of its economic cycle from a position of relative strength.

The RBI’s strategy now centers on liquidity support, effective transmission of earlier rate cuts, and close monitoring of global risks. If current trends persist, economists expect a steady policy stance through much of the coming year, allowing businesses and consumers to benefit from lower borrowing costs while the economy capitalizes on renewed momentum from international trade.

In short, India’s central bank is shifting from stimulus to stewardship, guiding a fast-expanding economy through a period of global uncertainty with a focus on stability, credit flow, and sustainable growth.

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