The Reserve Bank of India (RBI) is expected to keep its key interest rate unchanged next week amid risks of accelerating capital outflows and further weakening of the rupee.

The US Federal Reserve’s rate pause earlier this week has narrowed the space for India’s central bank to opt for a second consecutive repo rate cut in its February bi-monthly monetary policy. The rate-easing move could lead to foreign investors further withdrawing investments from the Indian market and the rupee depreciating more.   

Several economists said there is no immediate necessity for the RBI-led monetary policy committee (MPC) to cut the key repo rate next week to support growth, after reducing it by 25 basis points in the last review meeting in December. The MPC will conclude its three-day meeting on 6 February.

“The RBI can still hold the fire on growth without inducing another rate cut immediately in a highly uncertain geopolitical climate. The need of the hour was infusing liquidity into the banking system, which it has recently done to add over $23 billion via bond purchases, buying and selling forex swaps and repo operations,” said a senior bank official.

The RBI’s interventions to support the rupee from a dramatic fall has drained liquidity from the system. The Indian currency has weakened and depreciated by 2% this year, after falling by around 5% in 2025.

The central bank has been easing interest rates to support the economy while intervening in currency markets to protect a sliding rupee. 

Despite the signing of a free trade agreement with the European Union, the rupee has not stopped its fall. Two days after signing of the deal, the rupee plunged to a record low closing of 91.98 per dollar on Thursday.

The pressure on the rupee has continued in 2026 as capital inflows have been mute and a trade deal with the US has been elusive. The US under President Donald Trump has imposed 50% tariffs on Indian goods while India’s Prime Minister Narendra Modi has held his ground.

Foreign investors have withdrawn around $4 billion from the Indian stock market so far this year, continuing their $18 billion pullout in 2025.

Economists said a further lowering of the key repo rate may not bring back private capex. According to them, corporates are not speeding up their investments, despite a series of rate cuts, primarily because consumption demand has not revived. Growth at this stage is largely driven by government outlays and not private investment.

The RBI has reduced repo rate by 125 basis points since last February to bring it down to 5.25 basis points. The general expectation is that the central bank will introduce another rate cut of 25 basis points sometime later in the year, if conditions stay conducive. Inflation is expected to inch up this year but stay within the RBI’s target range of 4%.

Even without an immediate rate cut, India’s economy is expected to grow at a fast pace. RBI Governor Sanjay Malhotra has said in the recent past that India has entered the ‘Goldilocks phase’ with inflation being low and growth robust.

India’s growth has been projected to average 7.4% this financial year. The Economic Survey, tabled in Parliament today, has estimated a marginally slower growth of the economy at 6.8% to 7.2% in FY27, led by domestic demand amid global volatility. Even at this pace, India would continue to be the world’s fastest-growing major economy. 

The government is expected to bring some measures in the Union budget on 1 February to boost growth in the economy. Last year, the government had introduced tax cuts, including rationalisation in GST (goods and services tax) rates.

Economists said the RBI’s focus for now would be to see that the rate cuts are transmitted broadly into the economy, both on lending and deposit sides.

Banks will want the RBI not to cut interest rates as such a move would further squeeze their net interest margins (NIMs). With deposits trailing behind credit growth and competition being intense, banks are finding their margins being hurt. Though they have dropped deposit rates, they can’t lower it beyond a point due to market dynamics.