In a significant move that surprised a section of market analysts, the Reserve Bank of India (RBI) announced a reduction in its key policy rate on Friday. The central bank's Monetary Policy Committee (MPC) decided to cut the repo rate by 25 basis points, bringing it down to 5.25%.
Divergent Expectations and a Surprise Decision
This decision came against a backdrop of mixed expectations from economists. A pre-policy poll conducted by Mint, involving 13 economists, revealed a split in forecasts. Nine of the thirteen experts had anticipated the RBI would pause and hold rates steady, while the remaining four had correctly predicted a 25-basis-point reduction. This divergence highlighted the complex and rare macroeconomic situation India currently faces, characterized by simultaneously strong real GDP growth, weakening nominal GDP, record-low inflation, and emerging external risks.
The Data Driving the Decision
The central bank's pivot towards easing is firmly rooted in recent economic data. The most compelling factor is the dramatic cooling of retail inflation. According to government data released on 12 November, consumer price index (CPI) inflation plummeted to an all-time low of 0.25% in October. This was driven primarily by deflation in food prices, the pass-through effects of Goods and Services Tax (GST) rate cuts, and supportive base effects from the previous year.
Furthermore, for the fiscal year 2025-26 (FY26), consumer price inflation is currently tracking at around 2%. This figure is notably lower than the RBI's own estimate of 2.6% and sits comfortably within the central bank's mandated target band of 2-6%.
On the growth front, the economy displayed unexpected vigor. Data made public on 28 November showed India's GDP expanded by a robust 8.2% in the quarter ending September. This growth rate, a six-quarter high, surpassed the RBI's projection of 7% and the median estimate of 7.2% from another Mint survey of 15 economists.
Policy Stance and Future Trajectory
Despite the rate cut, the RBI's Monetary Policy Committee opted to maintain its 'neutral' monetary policy stance. This stance provides the central bank with the flexibility to adjust interest rates in either direction in the future, depending on incoming data. The rate reduction marks a shift after a period of stability; following cumulative cuts of 100 basis points in the first half of the year, the RBI had kept the repo rate unchanged since August.
Hints of this move were evident in recent commentary. RBI Governor Sanjay Malhotra, speaking on 24 November, indicated that recent economic data suggested there was still room for interest rate cuts. Friday's decision validates that view, signaling the central bank's focus on supporting growth while inflation remains well under control.
The interplay of soaring growth and collapsing inflation presents a unique policy puzzle. The RBI's latest action suggests it is prioritizing the utilization of available space to bolster economic momentum, while closely monitoring evolving risks from the global economy and domestic nominal growth trends.
