The Reserve Bank of India is expected to maintain its repo rate unchanged at 5.25% during the upcoming February monetary policy committee meeting, as economists anticipate the central bank will await new economic data before making further policy adjustments. The monetary policy committee is scheduled to convene from February 4-6, coinciding with the week following the Union budget presentation.

Inflation Trends Show Upward Pressure

Recent inflation data reveals mounting price pressures that may influence the RBI's policy stance. The following table highlights key inflation metrics:

The December consumer inflation print of 1.33% contributed to Q3 inflation averaging 0.8%, which was 20 basis points higher than the RBI's Q3 forecast of 0.6%. Economists believe the RBI will encounter similar upward pressure on its Q4 forecast of 2.9%.

Rate Cut Cycle Nears End

The central bank has implemented substantial monetary easing measures, having cumulatively reduced policy rates by 125 basis points since February 2025 to reach the current level of 5.25%. However, economists suggest this accommodative cycle may be approaching its conclusion.

"We do not foresee any further rate cuts for now, as inflation could be above 4% four quarters down," said Dhiraj Nim, economist and FX Strategist, ANZ Bank. "However, durable liquidity infusions are needed both to bring up reserve money growth and ease the prevailing upward pressure on borrowing costs."

Liquidity Management Takes Center Stage

With retail inflation projected to rise above 4% after four quarters, policy rates are widely expected to remain on hold during upcoming MPC meetings. This shift places greater emphasis on liquidity management strategies. System liquidity conditions have shown recent tightness, turning deficit in the second half of December before recovering to a tight surplus averaging ₹36,869.00 crore in January.

Economists anticipate significant open market operations to address liquidity requirements:

Soumya Kanti Ghosh, chief economic advisor at State Bank of India, expects approximately ₹2.00 lakh crore of open market operations in the remainder of FY26, with similar trends anticipated in the following fiscal year.

Market Outlook and Divergent Views

"Expectations are that another one or two tranches of OMOs and FX swaps are in the pipeline to compensate for the liquidity drain due to the FX intervention, besides seasonal leakage factors," said Radhika Rao, senior economist, DBS Bank.

However, Bank of Baroda presents a contrarian view, expecting the central bank to deliver one additional repo rate cut in February, arguing that softer inflation conditions provide room for further monetary easing. This divergent perspective highlights the ongoing debate among economists regarding the appropriate policy response to current economic conditions.

Reserve Bank Deputy Governor T Rabi Sankar has announced that India's Unified Payment Interface (UPI) user base could potentially grow from 400 million to 1 billion users, highlighting the significant expansion opportunities in the country's digital payment landscape. Speaking about the transformative impact of digital payments on India's financial ecosystem, the Deputy Governor emphasized the need for continued enhancement of digital payment infrastructure to promote greater financial inclusivity.

Current Market Position and Growth Trajectory

India currently accounts for half of the world's retail payment transactions, establishing itself as a global leader in digital payment adoption. However, the Deputy Governor noted that the number of digital transactions per person still lags behind many developed nations, indicating substantial room for growth. The comparison with Kenya, where digital transaction rates per person are approximately double those of India, underscores this potential for expansion.

UPI's Dominant Role in Digital Transactions

UPI has emerged as the dominant payment method in India, facilitating both Person to Person (P2P) and Person to Merchant (P2M) transactions. The platform processes approximately 81% of the country's retail payment transactions by volume, demonstrating its widespread adoption across various transaction types. The system allows users to link multiple bank accounts into a single mobile application, significantly enhancing convenience and accessibility for consumers.

The National Payments Corporation of India (NPCI), an RBI-promoted entity, launched a USSD-based service in 2016 to provide UPI access to feature phone users, expanding the platform's reach beyond smartphone users and promoting broader financial inclusion.

Global Expansion and International Connectivity

The Reserve Bank has been actively working on linking UPI with Fast Payment Systems (FPSs) of other countries through bilateral agreements. The linkage with Singapore has been operational since February 2023, with similar projects underway with the UAE and Nepal. These initiatives enable seamless inward and outward remittance payments, facilitating international financial transactions.

Indian UPI apps are now accepted via QR Code in several countries, including Bhutan, France, Mauritius, Nepal, Singapore, Sri Lanka, the UAE, and Qatar. This development enables Indian tourists, students, and business travelers to make payments using their Indian UPI apps while abroad, enhancing convenience for international transactions.

Economic Impact and Security Measures

A study cited by the Deputy Governor indicates that a 10% increase in digital payments could boost GDP by 0.3%, highlighting the significant economic implications of expanding digital payment adoption. The remarkable growth in digital payment transactions, with values rising from ₹2,071.00 crore in FY 2017-18 to ₹22,831.00 crore in FY 2024-25, reflects a compound annual growth rate of 41%.

To address cybersecurity concerns, the Reserve Bank has implemented various protective measures, including the 'mule hunter' initiative designed to combat digital frauds. The Deputy Governor emphasized the transformative social impact of UPI, noting that it enables individuals, including housewives, to securely operate small businesses from home, promoting entrepreneurship and economic participation across diverse demographics.