India’s central bank is signaling a prolonged pause on rate cuts, betting that trade relief from Washington and Brussels will cushion growth even as global risks mount.
India’s central bank kept its policy rate unchanged on Friday, opting for caution as newly secured trade deals with the United States and the European Union reshape the outlook for the world’s fastest-growing large economy.
The Reserve Bank of India (RBI) held the benchmark rate at 5.25%, in line with expectations from economists polled by Reuters. The decision marks a clear pause after a cumulative 125 basis points of rate cuts delivered last year, with policymakers now turning their attention to how effectively those reductions are flowing through the financial system.
RBI Governor Sanjay Malhotra said global conditions remain challenging, but recent progress on trade has materially improved India’s external backdrop. “External headwinds have intensified, though the successful completion of trade deals augurs well for the overall economic outlook,” Malhotra said, adding that near-term prospects for both inflation and growth remain supportive.
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Market participants read the statement as confirmation that the easing cycle is on hold for an extended period. Radhika Rao, senior economist and executive director at DBS Bank Singapore, said the central bank struck a balanced tone that points to stability rather than fresh stimulus. In her view, attention will now move squarely to liquidity conditions and policy transmission.
Malhotra reinforced that message, saying the RBI will remain proactive in managing liquidity to ensure banks have sufficient funds to meet productive demand and to support the pass-through of earlier rate cuts. That stance increases the likelihood of further open market operations over the coming quarters, a tool the central bank has used to inject durable liquidity into the system.
The pause also follows a major shift in India’s external environment. Earlier this week, U.S. President Donald Trump announced that Washington would cut tariffs on Indian exports to 18%. The move eased a key concern raised by the RBI at its previous policy meeting, when officials flagged trade uncertainty as a risk to growth.
Until the announcement, India had been facing tariffs of up to 50%, among the highest imposed by the U.S. and even steeper than those applied to China. The rollback marks a reset in trade relations between New Delhi and Washington and removes a significant drag on export-oriented sectors.
Economists say that development reduces the urgency for further rate cuts. Santanu Sengupta, chief India economist at Goldman Sachs, said the central bank is likely to hold rates for at least a year. He added that a cut might only have been considered if the U.S.-India trade deal had fallen through.
Even with borrowing costs steady, challenges remain on the bond market side. Sengupta noted that long-term yields are unlikely to ease meaningfully, as banks and insurance companies scale back purchases of government securities while supply continues to rise.
India’s borrowing plans underline that pressure. Finance Minister Nirmala Sitharaman said the government will borrow 17.2 trillion rupees, about $187 billion, in the financial year beginning April 1. The figure represents an 18% increase from the revised estimate for the current year and exceeded market expectations, raising questions about demand absorption in the debt market.
Against that backdrop, the RBI’s emphasis on liquidity management takes on added importance. With limited room for long-end yields to fall, policymakers are leaning on operational tools rather than headline rate moves to support credit conditions.
On growth, the central bank has reason for confidence. India’s latest economic survey projects expansion of 7.4% in the fiscal year ending March 2026, followed by growth of between 6.8% and 7.2% the year after. Those numbers keep India firmly ahead of its peers and extend its position as the fastest-growing major economy.
Inflation dynamics also give the RBI breathing space. Consumer inflation rose to 1.33% in December, up from 0.71% a month earlier, but remains far below the central bank’s medium-term target. The RBI now sees inflation averaging 2.1% in the current financial year, only marginally higher than its previous estimate.
Food supply conditions are expected to remain favorable in the near term, and the RBI said underlying price pressures should stay within range once volatility linked to precious metals is stripped out.
The policy decision underscores a shift in priorities. With growth resilient, inflation contained, and trade risks easing, the RBI is stepping back from aggressive rate action. Analysts believe the next phase of monetary policy will be defined less by headline cuts and more by how effectively past easing works its way through banks, bond markets, and, ultimately, the real economy.