RBI Keeps Repo Rate Unchanged in December Policy Review; Inflation Concerns Dominate Outlook

RBI Holds Steady Amid Global Uncertainty

The Monetary Policy Committee (MPC) of the Reserve Bank of India voted unanimously on Wednesday to maintain the repo rate at its existing level. The decision reflects the central bank’s cautious stance amid lingering global uncertainty, volatile commodity markets and a shifting geopolitical landscape.

The RBI acknowledged that while headline inflation has eased from previous peaks, it remains vulnerable to food-price shocks, energy volatility and supply chain disruptions. “Our priority remains price stability,” the Governor said, stressing that financial conditions must stay calibrated to support long-term economic health.

Growth Momentum Stable but Moderating

The central bank highlighted that India’s growth trajectory remains resilient, supported by strong domestic demand, infrastructure spending and a revival in manufacturing. However, it cautioned that global headwinds could moderate growth in the coming quarters.

Export-intensive sectors face challenges due to sluggish global demand, while high input costs continue to pressure small and medium-sized enterprises. Despite this, India’s GDP outlook remains comparatively stronger than that of many major economies.

Inflation: The Central Focus

Inflation continues to be the most critical element shaping the RBI’s stance. Although food inflation has eased somewhat, spikes in vegetables, pulses and cereals remain unpredictable. Crude oil’s upward trend has further complicated price stability.

The RBI warned that erratic weather patterns, including unseasonal rain and heatwaves, could disrupt agricultural output, adding volatility to food prices. Meanwhile, core inflation — which excludes food and fuel — has shown gradual easing but remains above comfort levels.

The central bank reiterated its commitment to anchoring inflation expectations through prudent policy action and macroeconomic stability measures.

Currency Watch: Rupee Under Pressure

The Indian rupee has experienced bouts of volatility due to a strengthened U.S. dollar, global interest rate divergence and risk-off sentiment among foreign investors. The RBI stated that it is actively monitoring currency fluctuations and will intervene when necessary to maintain orderly market conditions.

While India’s forex reserves remain robust, experts warn that sustained global pressures could test currency stability in the months ahead.

Banking Sector Stable, Credit Growth Strong

The central bank noted healthy credit growth across retail, MSME and corporate sectors. Improved asset quality and stronger balance sheets of banks indicate financial system stability.

However, the RBI cautioned lenders against aggressive unsecured lending, reminding institutions to strengthen underwriting standards and avoid excessive risk-taking during periods of economic uncertainty.

Liquidity Management: Balancing Surplus and Shortage

Liquidity in the financial system has fluctuated in recent months due to government cash balances, tax outflows and global market movements. The RBI said that it will continue to deploy variable rate repos and reverses to ensure adequate liquidity and smooth functioning of money markets.

Global Risks: The Elephant in the Room

The central bank highlighted several international risk factors impacting policy decisions:

• High U.S. interest rates drawing capital away from emerging markets
• Elevated crude oil prices due to geopolitical tensions
• China’s slow recovery affecting global supply chains
• Volatile global bond markets influencing capital flows
• Currency fluctuations across emerging economies

The RBI stated that India must remain alert and adaptable as global conditions continue to shift rapidly.

Digital Payments and Fintech: Growth with Oversight

The central bank reaffirmed its commitment to supporting India’s fintech innovation ecosystem while enhancing regulatory safeguards. With digital transactions hitting record highs, the RBI said it will strengthen surveillance, interoperability, cybersecurity norms and fraud detection frameworks.

Consumer protection remains a core priority as the digital payment ecosystem expands nationwide.

What It Means for Borrowers and Businesses

With the repo rate unchanged, borrowers may see stability in lending rates for home loans, personal loans and business credit. However, banks may continue revising risk premiums based on market conditions and regulatory advisories.

For businesses, particularly MSMEs, stable borrowing costs offer relief amid rising input prices. Still, exporters remain concerned about a strong U.S. dollar and global demand contraction.

Market Reaction: Cautious Optimism

Equity markets reacted with mild volatility but largely welcomed the RBI’s decision. Banking and financial stocks remained mixed, while rate-sensitive sectors such as real estate and automobiles saw minor gains.

Bond markets were stable, with yields moving slightly in anticipation of the central bank’s inflation commentary.

Expert Views: “A Safeguard Against Uncertainty”

Economists broadly agreed that holding the repo rate steady was the prudent decision amid mixed signals from global markets. Many highlighted the RBI’s cautious approach as necessary to avoid inflation resurgence while preserving growth momentum.

Some analysts warned that if global inflation resurfaces or crude prices spike further, the RBI may be forced to tighten policy in early 2026.

The Road Ahead: Data Will Drive Decisions

The RBI made it clear that future policy decisions will be guided by incoming data rather than predetermined timelines. Key data points to watch include:

• Inflation trends in food and fuel
• Crude oil price movements
• Global bond yields and capital flows
• India’s GDP growth momentum
• Manufacturing and services output

With several uncertainties looming globally, the central bank emphasised that flexibility and vigilance will be central to its policy strategy.

Conclusion: Stability Amid Uncertainty

The RBI’s December policy review reinforces a message of stability in turbulent global conditions. With inflation still a concern and international risks rising, the central bank’s steady hand aims to protect the Indian economy from external shocks while nurturing gradual, domestic-led growth.

As India enters 2026, policymakers, financial institutions and businesses will closely monitor the delicate balance between inflation control and economic expansion. The RBI has signalled its readiness to adapt swiftly — and decisively — as conditions evolve.