Benign inflation outlook to give policy space to support growth momentum: MPC minutes

RBI Governor Sanjay Malhotra | Photo credit: PTI

All members agreed that growth-inflation dynamics, especially the favorable inflation outlook, continue to provide policy space to support growth momentum.

Further, some members – Saugata Bhattacharya (Mumbai-based economist) and Poonam Gupta (RBI deputy governor) – allayed fears that the economy could overheat due to the cumulative 125 basis points cut in repo rates since February 2025, RBI said.

The Monetary Policy Committee (MPC) at its meeting from December 3 to 5, 2025, unanimously voted to reduce the policy repo rate by 25 basis points from 5.50 percent to 5.25 percent.

The MPC also decided to continue its neutral position. Ram Singh, director of the Delhi School of Economics, felt that the stance should be changed from neutral to accommodative.

Blips in H2

RBI Governor Sanjay Malhotra noted that while domestic economic activity remains resilient in the third quarter (October-December), weakness in some leading high-frequency indicators points to a slowdown in growth momentum in the second half (October 2025-March 2026) compared to the first half (April-September 2025).

Looking ahead into the first half of next year, domestic growth is expected to remain strong, albeit moderate to 6.7-6.8 percent, he said.

Moreover, headline inflation for the full year (FY26) is likely to be around 2 percent, half of what was forecast at the beginning of the year. Overall inflation is expected to be close to the 4 percent target in the first half of FY27.

“So demand pressure, as reflected by low core inflation (excluding precious metals), is minimal and expected to remain low for the next three quarters. Given the favorable inflation outlook (both nominal and core), real interest rates should be lower. Therefore, I am voting for a 25 basis point rate cut. This will also boost demand and support growth,” Malhotra said.

The growth will continue

Deputy Governor Gupta noted that there are indications that growth performance in the second half of the year may moderate from the high levels of the first half of the year, but remain strong.

She emphasized that inflation dynamics have been more favorable than previously expected. Inflation has been below the 4 percent target for the past nine months, averaging 2.3 percent, and is likely to remain under control for at least another nine months. Average inflation for FY26 is expected to be 2 percent, down 60 basis points from October policy.

Gupta said: “One wonders whether the current rate cut, resulting in a cumulative rate cut of 125 basis points, could lead to overheating of the economy. Not only headline and core inflation, but also most other nominal indicators of the economy are prevailing at levels that indicate the economy is not showing any signs of overheating at the moment. Instead, one could interpret the data as indicating that there is slack in the economy.”

Published on December 19, 2025