11: RBI Holds Repo Rate at 5.25% with Neutral Stance

• Status Quo Maintained: In its February 2026 meeting, the RBI Monetary Policy Committee (MPC) unanimously voted to keep the policy repo rate unchanged at 5.25%, following a cumulative reduction of 125 basis points over the previous year. • Upward Growth Revision: The RBI revised India’s real GDP growth projection for FY2025-26 upward to 7.4% (from 7.3%), citing robust domestic consumption, a revival in manufacturing, and strong credit growth (approx. 14%). • Inflation Trajectory: Headline CPI inflation is projected at 2.1% for FY26 but is expected to trend toward 4.0% in Q1 FY27 and 4.2% in Q2 FY27 due to unfavorable base effects and rising prices of precious metals like gold. • Neutral Policy Stance: The MPC retained its \'neutral\' stance (voted 5:1), signaling flexibility to act in either direction based on incoming data, rather than committing to further pre-emptive easing. • Liquidity & External Risks: While system liquidity remains in surplus (avg. ₹70,000 cr), the RBI flagged risks from geopolitical frictions and trade tensions that could unravel global economic stability and impact energy prices. • MSME Credit Boost: In a key regulatory move, the limit for collateral-free loans to MSMEs was enhanced from ₹10 lakh to ₹20 lakh to strengthen last-mile credit delivery and entrepreneurship. Key Definitions & Provisions • Repo Rate: The interest rate at which the RBI lends money to commercial banks against government securities to manage liquidity and inflation. • Monetary Policy Committee (MPC): A 6-member statutory body (constituted under the RBI Act, 1934) empowered to determine the policy interest rate required to achieve the inflation target. • Standing Deposit Facility (SDF): The floor of the liquidity corridor (currently 5.0%) used to absorb excess liquidity from banks without the need for collateral. • Neutral Stance: A policy position where the central bank is neither in an expansionary (rate-cutting) nor contractionary (rate-hiking) mode, keeping future options open. Conclusion The RBI’s decision reflects \'strategic patience,\' balancing the need to support a 7.4% growth momentum while remaining vigilant against a projected uptick in inflation. The focus has shifted from aggressive rate cuts to ensuring effective credit transmission and maintaining financial stability. UPSC Relevance • GS Paper 3: Indian Economy; Issues relating to planning, mobilization of resources, growth, and development. • Prelims: Components of Monetary Policy (Repo, SDF, MSF); Composition of MPC; Inflation targeting framework (4% +/- 2%).