In a significant and somewhat unexpected move, the Reserve Bank of India (RBI) announced a reduction in the key repo rate on Friday, bringing it down by 25 basis points to 5.25%. This decision comes at a time when the Indian economy is displaying robust expansion and inflation has dipped to exceptionally low levels.
A Unanimous Decision in a Goldilocks Phase
The RBI's Monetary Policy Committee (MPC) voted unanimously for the rate cut while maintaining a neutral policy stance. RBI Governor Sanjay Malhotra characterized the current economic environment as a "rare goldilocks period" for India, marked by powerful growth and benign price pressures. The central bank has revised its inflation projection for 2025–26 down to 2.0%, a sharp drop from the 2.6% forecast in October and 4.2% in February.
This optimistic inflation outlook is underpinned by several favourable factors:
- Lower food prices
- Strong kharif production
- Healthy rabi sowing progress
- Adequate reservoir levels
- Favourable soil moisture conditions
Global Rarity: Cutting Rates Amid High Growth
The State Bank of India (SBI), in its latest research report, hailed the RBI's action as "exceptional." The bank pointed out that such a policy step is uncommon on the global stage, where central banks typically hike rates to cool an overheating economy. India's economy grew by over 8.2% in the July-September quarter of 2025, while inflation slipped to a mere 0.25% in October.
SBI Research highlighted minimal historical instances in other major economies like the UK, China, and Indonesia where rates were reduced during phases of high GDP growth. The report cited specific examples:
- United Kingdom (Early 1970s): Chancellor Anthony Barber's "dash for growth" involved rate cuts despite inflation at 11% and growth at 12.5%.
- Indonesia (1995-1997): Successive rate cuts preceded the Asian financial crisis, implemented when growth was 8.6% and inflation was 7.4%.
- China (2012 & 2015): Rate cuts occurred when inflation averaged 1.8% and growth stood at 7.4%.
Revised Forecasts and Cautious Optimism
Alongside the rate cut, the RBI has also adjusted its growth projections. Real GDP growth for 2025–26 is now estimated at 7.3%. Looking ahead, the first and second quarters of 2026–27 are projected to grow at 6.7% and 6.8%, respectively. SBI Research forecasts inflation for FY26 at 1.8% and for FY27 at 3.4%.
The report noted that with such unprecedented downward revisions and the potential for more, "the RBI has kept the door ajar for future rate decisions." It added that the repo rate of 5.25% is likely to "be lower for longer." However, SBI also cautioned that the growth outlook faces downside risks from:
- Ongoing global tariff and trade policy uncertainties.
- Prolonged geopolitical tensions.
- Volatility in international financial markets driven by investor risk-off sentiment.
Despite these external headwinds, the report expects GDP growth to remain above 7% in the third and fourth quarters, potentially bringing the full-year growth for 2025–26 to 7.6%. Concluding its analysis, SBI emphasized that while the central bank has played its part in supporting growth, it is now incumbent upon the markets to remain disciplined and avoid overreaction. Governor Malhotra expressed confidence, stating the RBI approaches the new year with "hope, vigour and determination to further support the economy and accelerate progress."
