7 Feb 2026·Source: The Hindu

4 min

EconomyNEWS

RBI Holds Policy Rate, FY26 Inflation Outlook at 2.1%

RBI maintains policy rate; macroeconomic factors strong; FY27 GDP revised upwards.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has voted to keep the policy repo rate unchanged at 5.25%. The MPC noted that external headwinds have intensified, though successful trade deals augur well for the economic outlook. The revised outlook for CPI inflation in Q1:FY27 and Q2 is at 4% and 4.2% respectively. Real GDP growth projections for Q1:FY27 and Q2 are revised upwards to 6.9% and 7%, respectively.

Key Facts

The MPC voted unanimously to keep the policy repo rate unchanged at 5.25%.

The MPC decided to continue with a neutral stance.

The revised outlook for CPI inflation in Q1:FY27 and Q2 is at 4% and 4.2%, respectively.

Real GDP growth projections for Q1:FY27 and Q2 are revised upwards to 6.9% and 7%, respectively.

UPSC Exam Angles

GS Paper 3 (Economy): Monetary policy, inflation, economic growth

Connects to syllabus topics on Indian economy, RBI functions, inflation control

Potential question types: Statement-based, analytical questions on monetary policy effectiveness

Visual Insights

Key Economic Indicators - February 2026

Highlights of the RBI's Monetary Policy Committee (MPC) decisions and economic outlook.

Policy Repo Rate: 5.25%
FY27 Q1 CPI Inflation Outlook: 4%
FY27 Q2 CPI Inflation Outlook: 4.2%
FY27 Q1 Real GDP Growth Projection: 6.9%
FY27 Q2 Real GDP Growth Projection: 7%

More Information

Background

The Reserve Bank of India (RBI) plays a crucial role in managing the Indian economy through its monetary policy. This policy aims to control inflation and promote economic growth. The RBI's key tool is the repo rate, the interest rate at which commercial banks borrow money from the RBI. Changes in the repo rate influence borrowing costs across the economy. The RBI's mandate is guided by the RBI Act, 1934, which provides the legal framework for its operations. The Monetary Policy Committee (MPC), formed in 2016, is responsible for setting the repo rate and other policy rates. The MPC's decisions are based on an assessment of current and future economic conditions, including inflation, growth, and external factors. Historically, India has faced challenges in managing inflation. High inflation can erode purchasing power and discourage investment. The RBI uses various tools, including the repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR), to control the money supply and keep inflation within a target range. The current target is 4% with a tolerance band of +/- 2%. The Fiscal Responsibility and Budget Management (FRBM) Act also plays a role in maintaining macroeconomic stability. While the RBI focuses on monetary policy, the FRBM Act aims to ensure fiscal discipline by setting targets for government debt and deficit. Coordination between monetary and fiscal policies is essential for achieving sustainable economic growth.

Latest Developments

In recent years, the RBI has focused on managing inflation while supporting economic recovery after the COVID-19 pandemic. The MPC has adjusted the repo rate based on evolving economic conditions. The current decision to hold the rate at 6.5% reflects a cautious approach, balancing the need to control inflation with the desire to support growth.

External factors, such as global economic conditions and geopolitical tensions, also influence the RBI's decisions. The MPC noted that external headwinds have intensified. Successful trade deals, however, offer a positive outlook. The RBI closely monitors these global developments and their potential impact on the Indian economy.

The RBI is also working to strengthen the financial system and promote financial inclusion. It has introduced measures to improve the efficiency of payment systems and expand access to banking services. These efforts aim to support sustainable and inclusive economic growth.

Looking ahead, the RBI is expected to continue to focus on maintaining price stability and supporting economic growth. The MPC's future decisions will depend on the evolving economic outlook and the impact of various domestic and external factors. The revised outlook for CPI inflation in Q1:FY27 and Q2 is at 4% and 4.2% respectively. Real GDP growth projections for Q1:FY27 and Q2 are revised upwards to 6.9% and 7%, respectively.

Frequently Asked Questions

1. What is the current policy repo rate as decided by the RBI's MPC?

The MPC has decided to keep the policy repo rate unchanged at 5.25%. This is a key figure to remember for the exam.

Exam Tip

Remember the current repo rate as it's a frequently asked question in Prelims.

2. What are the revised CPI inflation outlooks for Q1:FY27 and Q2:FY27?

The revised outlook for CPI inflation is 4% for Q1:FY27 and 4.2% for Q2:FY27. These figures are important for understanding the RBI's inflation management strategy.

Exam Tip

Note the slight increase in inflation from Q1 to Q2. This trend can be important for answering analytical questions.

3. What are the real GDP growth projections for Q1:FY27 and Q2:FY27?

Real GDP growth is projected at 6.9% for Q1:FY27 and 7% for Q2:FY27. The upward revision indicates a positive economic outlook.

Exam Tip

Pay attention to the upward revision of GDP growth, as it reflects the RBI's confidence in economic recovery.

4. What is the significance of the repo rate in the Indian economy?

The repo rate is the interest rate at which commercial banks borrow money from the RBI. Changes in the repo rate influence borrowing costs across the economy, impacting inflation and economic growth. It is a key tool used by the RBI in its monetary policy.

5. Explain the relationship between the repo rate, inflation, and economic growth.

The RBI uses the repo rate to manage inflation and promote economic growth. Raising the repo rate can curb inflation by making borrowing more expensive, but it can also slow down economic growth. Lowering the repo rate can stimulate growth by making borrowing cheaper, but it can also lead to higher inflation. The RBI aims to strike a balance between these two objectives.

6. What are external headwinds, and how do they affect the RBI's monetary policy?

External headwinds refer to global economic conditions, such as global inflation, geopolitical tensions, and fluctuations in commodity prices, that can negatively impact the Indian economy. The MPC considers these factors when deciding on the repo rate and other monetary policy measures to mitigate their effects.

7. What are the potential implications of the RBI's decision to hold the policy rate for the common citizen?

Holding the policy rate steady can provide stability in borrowing costs for individuals and businesses. This can help maintain EMIs on loans and support investment decisions. However, it also means that interest rates on savings accounts may not increase, potentially impacting returns on savings.

8. Why has the RBI chosen to maintain a neutral stance?

The MPC decided to continue with a neutral stance to allow for flexibility in responding to evolving economic conditions. This approach allows the RBI to adjust its policy as needed, based on incoming data on inflation and growth.

9. Why is this news about RBI holding the policy rate in the news recently?

This decision is recent and reflects the RBI's current assessment of the economic situation, balancing the need to control inflation with the desire to support economic growth. The news highlights the RBI's approach to managing the economy in the face of both domestic and global challenges.

10. What are the recent developments related to the RBI's monetary policy?

The recent developments include the MPC's decision to hold the policy repo rate unchanged, the revised outlook for CPI inflation, and the upward revision of real GDP growth projections for Q1:FY27 and Q2:FY27. These changes reflect the RBI's ongoing efforts to manage inflation and support economic recovery.

Practice Questions (MCQs)

1. Consider the following statements regarding the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI): 1. The MPC is responsible for setting the policy repo rate. 2. The MPC was formed in 2016. 3. The MPC aims to maintain CPI inflation at 6% with a tolerance band of +/- 2%. Which of the statements given above is/are correct?

A.1 and 2 only
B.2 and 3 only
C.1 and 3 only
D.1, 2 and 3

Show Answer

Answer: A

Statement 1 is CORRECT: The MPC is indeed responsible for setting the policy repo rate, which is the interest rate at which commercial banks borrow money from the RBI. Statement 2 is CORRECT: The MPC was formed in 2016 to bring more transparency and accountability to the monetary policy-making process. Statement 3 is INCORRECT: The MPC aims to maintain CPI inflation at 4% (not 6%) with a tolerance band of +/- 2%.

2. Which of the following is NOT a tool used by the Reserve Bank of India (RBI) to control the money supply in the economy?

A.Repo Rate
B.Cash Reserve Ratio (CRR)
C.Statutory Liquidity Ratio (SLR)
D.Goods and Services Tax (GST)

Show Answer

Answer: D

The correct answer is D) Goods and Services Tax (GST). GST is an indirect tax levied on the supply of goods and services. It is a fiscal tool used by the government for revenue generation, not a monetary tool used by the RBI to control the money supply. Repo Rate, CRR, and SLR are all monetary tools used by the RBI.

3. With reference to the Fiscal Responsibility and Budget Management (FRBM) Act, consider the following statements: 1. The FRBM Act aims to ensure fiscal discipline by setting targets for government debt and deficit. 2. The FRBM Act mandates the central government to reduce the fiscal deficit to 3% of GDP. 3. The FRBM Act was enacted in 1991 following the economic crisis. Which of the statements given above is/are correct?

A.1 and 2 only
B.2 and 3 only
C.1 and 3 only
D.1, 2 and 3

Show Answer

Answer: A

Statement 1 is CORRECT: The FRBM Act indeed aims to ensure fiscal discipline by setting targets for government debt and deficit. Statement 2 is CORRECT: The FRBM Act mandates the central government to reduce the fiscal deficit to 3% of GDP, although this target has been revised and postponed several times. Statement 3 is INCORRECT: The FRBM Act was enacted in 2003, not 1991.