RBI Likely to Hold Rates Amid Currency Swings, Trade Deal Impact

The report stated that, despite earlier policy-rate easing, the central bank will hold rates this time, as several macroeconomic and global factors continue to pose challenges.

It noted that government bond yields have shown persistent hardening in recent periods, even after policy rate easing.

According to the report, the effectiveness of Open Market Operations (OMOs) may be influenced by the choice of eligible securities, even if the overall quantum of liquidity injection remains unchanged.

This, it said, could limit the transmission of monetary policy actions, so SBI said "RBI is thus likely to maintain status quo in the upcoming policy"

Since the last policy meeting, one of the major developments has been the finalisation of the EU-India and US-India trade deals, which have led to a sharp reduction in tariffs on Indian goods, from 50 per cent to 18 per cent.

The report highlighted that India now has one of the lowest tariff rates among Asian countries, which is expected to support export competitiveness and improve trade prospects.

However, the report cautioned that the global economy remains uncertain. It noted that the Geo-Economics Stress Index indicates heightened uncertainty leads to economic stress with a lag of three to four months, suggesting risks may emerge in the near term.

On the commodity front, the report noted that metal prices have recovered after witnessing a significant sell-off last week, adding another layer of complexity to the inflation and growth outlook.

The report also noted that slack in the labour market, stagnant real disposable incomes, and a reduced inflationary impact could prompt rate cuts by the US Federal Reserve in the coming period, which may influence global capital flows and currency movements.

Against this backdrop, the Indian rupee has remained volatile, see-sawing between 89 and 92 per dollar over the past two months. It has depreciated by 5.8 per cent against the US dollar since April 2, 2025, when the US announced sweeping tariff hikes across economies.

However, the rupee appreciated significantly by more than Re 1 following the India-US trade deal that reduced tariffs to 18 per cent.

On inflation, the report said that new CPI weights, with an unchanged index for domestic inflation, indicate a marginal increase in overall CPI by 20-30 basis points. However, in months when food inflation is higher, the new CPI could be lower by 20-30 basis points.

Considering these mixed signals, the report concluded that the RBI is likely to maintain a cautious stance and keep the policy rates unchanged.

The RBI's MPC meeting is underway for three days from February 4th to 6th, with the policy outcome to be announced on Friday, February 6.

- ANI