The Reserve Bank of India's Governor, Sanjay Malhotra, was in favor of reducing the key interest rate during the central bank's December policy meeting, according to the minutes of the Monetary Policy Committee (MPC) released on Friday. Malhotra argued that the positive inflation scenario created room for easing monetary policy to stimulate economic demand.
Governor's Rationale for Easing Monetary Policy
Sanjay Malhotra voted for a reduction of 25 basis points in the repo rate, which serves as the benchmark for lending rates. He based his decision on a benign outlook for both headline and core inflation. The Governor stated that real interest rates needed to be lower under these conditions. Furthermore, he emphasized that the rate cut would play a crucial role in boosting demand and providing support for the country's economic growth momentum.
Malhotra also expressed support for maintaining a neutral monetary policy stance. He highlighted that this approach offers the necessary flexibility for the RBI to remain dependent on incoming data and to respond appropriately as macroeconomic conditions and forecasts evolve.
December Rate Cut and Economic Context
The RBI ultimately announced a 25 basis points cut in the repo rate to 5.25% on December 5. The central bank described the economic environment as a "rare goldilocks period", characterized by robust growth alongside manageable inflation. This move came as a surprise to a segment of market participants who had anticipated the MPC would hold rates steady.
The decision was supported by strong economic data. India's economy expanded at a surprising pace of 8.2% in the quarter ending September, marking a six-quarter high. This growth figure significantly exceeded the RBI's own projection of 7% and a median estimate of 7.2% from a survey of economists.
For the fiscal year 2025-26 (FY26), the six-member MPC revised its forecasts, raising the GDP growth projection to 7.3% from the earlier 6.8%. Concurrently, the committee lowered its retail inflation forecast to 2% from 2.6%.
Future Rate Trajectory and Expert Views
The December reduction marked the fourth rate cut since February 2025, following pauses in the August and October meetings. Cumulatively, the rate-setting panel has lowered the repo rate by 125 basis points in the calendar year 2025, making borrowing cheaper for consumers and businesses while also impacting deposit rates.
However, some economists are skeptical about the potential for further monetary easing. Neelkanth Mishra, Chief Economist at Axis Bank and a part-time member of the Prime Minister's Economic Advisory Council, stated on Tuesday that he does not expect more rate cuts in the current cycle. Mishra pointed to an anticipated rise in headline inflation as the primary reason.
He suggested that a scenario of keeping interest rates "lower for longer" is a reasonable expectation for the market to factor in. This outlook comes as India's retail inflation, measured by the Consumer Price Index (CPI), edged up to 0.7% in November from 0.25% in October.
