India Pauses Rate Cuts as US Trade Deal Boosts Economic Outlook

2026-02-06 economy

Mumbai, Friday, 6 February 2026.
Defying calls for cheaper credit, the central bank sees Washington’s surprise tariff cut to 18% as enough stimulus to halt its easing cycle and prioritize stability.

A Strategic Pivot to Stability

On Friday, the Monetary Policy Committee (MPC) voted unanimously to maintain the status quo, keeping the stance “neutral” following a detailed assessment of the evolving macroeconomic environment [1][2]. This decision halts a cycle of easing that saw the central bank reduce benchmark rates by a cumulative 125 basis points over the previous year [3]. The pause signals a distinct strategic pivot; rather than continuing with headline monetary easing, the Reserve Bank of India (RBI) is shifting its focus toward targeted regulatory and structural interventions to strengthen credit transmission and market depth [4]. Governor Sanjay Malhotra noted that while external headwinds have intensified, the successful completion of trade deals—specifically with the U.S. and Europe—augurs well for the economic outlook [1][4].

Trade Winds and Fiscal Realities

The economic calculus was significantly altered earlier this week when U.S. President Donald Trump announced a reduction in tariffs on Indian exports to 18% [3]. This trade policy shift appears to have alleviated the immediate pressure for domestic stimulus, allowing the central bank to revise its real GDP growth forecast for the fiscal year ending March 2026 to 7.4% [3][5]. Inflation dynamics also played a crucial role in the committee’s decision. Although December 2025 saw consumer inflation rise to 1.33%—up from 0.71% the previous month—the central bank projects inflation for the current financial year to average 2.1%, remaining well within its tolerance band of 2% to 6% [3][5].

Impact on Borrowers and Liquidity

For the average consumer, the status quo offers stability rather than immediate relief. With the repo rate held at 5.25%, home loan EMIs—particularly those linked to external benchmarks—are unlikely to rise [8]. Current home loan rates are hovering around an approximate 7.5%, a level that industry experts describe as comfortable for sustaining housing demand [7]. Looking ahead, the banking system remains flush with funds. System liquidity has maintained a surplus, averaging 70,000 crore rupees daily since December and rising to nearly 2 lakh crore rupees in February [4]. With the central bank emphasizing the transmission of previous rate cuts rather than implementing new ones, the focus has squarely shifted to ensuring these liquidity conditions translate into effective credit flow for the productive sectors of the economy [4][8].

Sources

Monetary Policy International Trade