US trade deal cements case for monetary pause 

India US Trade Deal

The Monetary Policy Committee’s (MPC’s) last scheduled review for FY2026 comes at the end of an incredibly eventful week. The Union Budget for FY2027 pencilled in marginal fiscal consolidation amid a healthy double-digit expansion in growth-supportive capex. However, the higher-than-expected gross issuance number for FY2027 pushed up G-sec yields further.

Subsequently, the trade deal with the US was announced, lowering tariffs on India to 18% from 50%, which helped the rupee strengthen. The expected boost to the growth outlook is likely to cement the case for a pause in the February 2026 policy review, with new data series for CPI and GDP to be unveiled later in the month.

New inflation index will introduce changes

Inflation outcomes have remained benign over the last two months. The CPI inflation has expectedly inched up from the record low 0.3% in October 2025 to 0.7% in November 2025 and further to 1.3% in December 2025, amid a narrowing deflation in the food and beverages (F&B) segment. It averaged at 0.8% in Q3 FY2026, remaining below the lower bound of the MPC’s target range of 2%-6% for the second consecutive quarter.

As the favourable base dissipates, ICRA estimates the headline print to inch up further to ~2.3% in January 2026 and cross 3.0% by March 2026 and 4.0% thereafter by September 2026, while evolving largely in line with the MPC’s forecasted trajectory. However, these projections are based on the old CPI series (base year: 2012), and the upcoming data will be for the new CPI series (base year: 2024), which encompasses multiple changes including a larger item basket, new data sources and updated weights.

It’s difficult to estimate the magnitude of change with new index

How will these changes impact inflation readings? This is a difficult question to answer. For instance, the new all-India group wise weights available in the Expert Group Report on Comprehensive Updation of Consumer Price Index point to a significant fall in the weight of the F&B segment to 36.8% from the 45.9% currently.

A back-of-the-envelope calculation using these would suggest that the peaks and troughs in food inflation prints would be narrower vis-à-vis the current series, which would also reflect in the headline print. However, jumping to such conclusions may be premature, as changes in item/sub-group weights within the F&B group would matter; for example, if the weight of vegetables, which is the most volatile sub-group within F&B, largely remains unchanged, then outcomes may remain unfavourable. Thus, it would be best to wait for the first data release for the new series, due on February 12, 2026.

October-December quarter growth may taper

On the growth front, the year-on-year (YoY) performance of high frequency indicators was mixed in Q3 FY2026 relative to Q2. While ICRA pegs the GDP growth at a healthy 7.1-7.2% in Q3 FY2026, this is softer than the 8.0% seen in H1 FY2026, partly owing to an unfavourable base.

Moreover, sharp YoY contraction in the GoI’s capital expenditure (-23.4%) as well as non-interest non-subsidy revenue spending (-9.1%) in Q3 FY2026 is likely to weigh on GDP growth in the quarter, even as buoyant festive demand aided by GST rate rationalisation may have supported private consumption.

GDP base revision induces uncertainty in forecasts

Here too, the change in the base year for the GDP series to 2022-23 from 2011-12, due at end-February 2026, would constrain the growth forecasts. The new dataset would also provide the updated data for the FY2024-2026 period, which may result in changes in quarterly/annual growth rates for this period, leading to a reassessment of past growth outcomes. This could also have a bearing on the near-term growth trajectory as well as expectations around potential growth.

MPC may pause rate action even as it supports liquidity

With this data overhaul on the anvil, we believe that the MPC will likely abstain from tweaking its growth and inflation projections, which are based on the old series. In fact, apart from the positive cues on growth on account of the trade deal and the government’s budgeted capex hike, ICRA also believes it would be appropriate to maintain status quo on policy rates in the MPC meeting later this week to assess the new GDP and CPI data. These data series will determine the current growth-inflation mix, and aid in forming a fresh outlook.

Nevertheless, we expect the Reserve Bank of India to continue to focus on providing further liquidity support in the near term, through open market operations and term variable rate repos during February-March 2026. These, along with the Rs. 0.9 trillion buy-back pencilled in the Budget, would be important to provide some respite on the liquidity front, given the seasonal stress that is typically seen during this period. They may also help to cool bond yields from the current one-year high levels.

(Aditi Nayar is Chief Economist, Head- Research & Outreach, ICRA.)

Views are personal and do not represent the stand of this publication.