RBI cuts repo rate by 25 bps, raises FY26 growth outlook

The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday announced a 25 basis-point reduction in the policy repo rate, bringing it down to 5.25%, in a unanimous decision that marked its first rate cut in several quarters. Governor Sanjay Malhotra, while unveiling the policy outcome, said the move reflects the central bank’s confidence in India’s strengthening growth prospects and a favourable inflation trajectory.With the latest reduction, the standing deposit facility (SDF) rate now stands adjusted to 5% from 5.25%. The marginal standing facility (MSF) rate and the Bank Rate have also been lowered to 5.5% from 5.75%, aligning the entire interest rate corridor with the repo rate revision.
Malhotra stated the “growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum,” underscoring the central bank’s rationale for easing. The MPC also voted to maintain its policy stance as neutral, indicating flexibility to shift course depending on incoming data.The move has been welcomed by economists and markets, who broadly anticipated a gradual pivot towards policy easing. “The repo rate cut, along with liquidity easing measures, is exactly in line with expectations. With the RBI continuing to leave room open for further easing, another 25 bps cut cannot be ruled out. The likely terminal rate appears to be around 5%, followed by a prolonged pause,” said Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank.
In a significant upward revision, the MPC raised India’s GDP growth forecast for FY26 to 7.3%, up from the earlier estimate of 6.8%. The revision reflects the economy’s sustained expansion, particularly highlighted by an 8.2% GDP growth print in Q2 FY26 (July–September)—one of the strongest quarterly performances in recent years.Analysts say that strong domestic demand, resilient investment activity, and improving global conditions have strengthened India’s medium-term growth outlook. The combination of robust growth and easing price pressures, they add, has created the policy room for the RBI to extend monetary support.On the inflation front, the MPC sharply revised its FY26 forecast downward to 2%, compared with the earlier projection of 2.6% announced in October.The new quarterly projections point to a subdued inflation path ahead, with inflation expected to remain low at 0.6% in Q3 FY26, before rising modestly to 2.9% in Q4 FY26. The trajectory is projected to firm up gradually in the following fiscal year, with inflation estimated at 3.9% in Q1 FY27 and 4.0% in Q2 FY27, reflecting a measured normalization in price pressures over the medium term.These are considerably softer than the October projections, which had pencilled in inflation at 1.8% for Q3, 4% for Q4, and 4.5% for Q1 FY27.The December review comes amid a remarkable decline in retail inflation. Headline CPI has fallen to a multi-decade low of about 0.25%, driven primarily by a steep correction in food prices and reductions in GST rates on select consumer items. This disinflationary trend, policymakers noted, has materially reduced price pressures across categories.

(Business Correspondent)