In a significant move aimed at bolstering economic momentum, the Reserve Bank of India (RBI) has announced a reduction in its key policy rate. The central bank's Monetary Policy Committee (MPC), after a three-day meeting, decided to cut the repo rate by 25 basis points, bringing it down to 5.25 per cent with immediate effect.
Unanimous Decision Amid a Goldilocks Scenario
RBI Governor Sanjay Malhotra stated that the MPC, which met from December 3 to December 5, voted unanimously for the rate cut. This decision comes against the backdrop of what the RBI termed a "rare goldilocks period," characterized by inflation at a benign 2.2 per cent and robust growth averaging 8.0 per cent in the first half of the 2025-26 financial year.
Governor Malhotra elaborated that while inflation remains well within the central bank's comfort zone and is projected to stay soft, there are expectations that GDP growth may soften in the coming quarters. "Growth, while remaining resilient, is expected to soften somewhat," he noted. This assessment of a favourable growth-inflation balance provided the necessary policy space for the rate reduction.
Revised Forecasts and Policy Stance
Interestingly, alongside the rate cut, the RBI has raised its GDP growth forecast for the current financial year by 50 basis points, from 6.8% to 7.3%. This revision follows the better-than-expected GDP growth of 8.2% recorded in the second quarter.
However, the inflation outlook has been revised downwards. The MPC observed that headline inflation has eased significantly, primarily due to exceptionally low food prices. Both headline and core inflation are now projected to be at or below the 4% target during the first half of 2026-27. The committee has decided to maintain a neutral monetary policy stance, indicating future actions will be data-dependent.
Consequent to the repo rate change, the standing deposit facility rate stands adjusted to 5.00 per cent, while the marginal standing facility rate and the Bank Rate have been set at 5.50 per cent.
Navigating Risks and Supporting Growth
The central bank acknowledged emerging challenges despite the strong macroeconomic numbers. It cautioned that while high-frequency indicators suggest domestic economic activity is holding up in the third quarter, there are some signs of weakness in a few leading indicators. External uncertainties continue to pose downside risks, though progress in trade negotiations could offer upside potential.
Governor Malhotra emphasized the economy's resilience. "Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience and is poised to register high growth. The headroom provided by the inflation outlook has allowed us to remain growth supportive," he stated.
The rate cut, although anticipated by many after October's record-low inflation of 0.25%, had become less certain following the stellar GDP print. The MPC's decision underscores its priority to support growth momentum while inflation remains under control, aiming to ensure macroeconomic stability in a proactive manner.
