Sanjay Malhotra, Governor of the Reserve Bank of India (RBI) | Photo credit: PTI
After the repo rate remained unchanged in the previous two bi-monthly reviews of monetary policy, the six-member Monetary Policy Committee (MPC) turned dovish and voted to cut the interest rate from 5.50 percent to 5.25 percent, the lowest level in three years.
The fifth meeting of MPC in FY26 also decided to continue with the neutral position. However, Ram Singh, director of the Delhi School of Economics, felt that the stance should be changed from neutral to accommodative.
In the current calendar year, the RBI has cumulatively reduced the repo rate by 125 basis points.
In the run-up to the MPC decision, market players were almost evenly divided on the possibility of a 25 basis point reduction in the repo rate and a continuation of the status quo.
Liquidity measures
Along with the rate cut, the RBI has announced liquidity-enhancing measures – it will conduct OMO (open market operation) purchases of government securities (G-Secs) of ₹1 lakh crore and a three-year USD/INR Buy Sell swap of USD 5 billion later this month to inject sustainable liquidity into the system.
The central bank also raised its FY26 real GDP growth projection by 50 basis points (bps) to 7.30 percent and cut its CPI inflation projection by 60 basis points to 2 percent.
Governor Sanjay Malhotra noted that inflation at a favorable 2.2 percent and growth at 8.0 percent in the first half of FY2026 (April-September) marks a rare Goldilocks period.
According to Malhotra, the MPC highlighted that headline inflation has eased significantly and is likely to be softer than previous projections, mainly due to exceptionally favorable food prices.
“Both headline and core inflation are expected to be at or below the 4 percent target in the first half of FY27. Underlying inflationary pressures are even lower as the impact of the increase in precious metals prices is around 50 basis points. Growth, while resilient, is expected to soften somewhat,” he said.
Thus, the growth-inflation balance, especially the favorable inflation outlook for both headline and core rates, continues to provide policy space to support growth momentum.
Referring to the high-frequency indicators being tracked by the RBI, the Governor said the growth in the second half (October-March) of FY26 will not be on par with the growth in the first half (April-September) of FY26 (of around 8%).
To a question on whether MPC has more room to support growth, Malhotra said: “Our expectation is that inflation will be very benign. Whether that opens up room for further rate cuts, that will lead to speculation. I don’t want to comment on that question.”
“For me, the more important thing now is that having cut the policy rate by 25 basis points, we now have to focus on the transmission of monetary policy. I think we have to first penetrate this into the real economy, and then we will see how inflation behaves, how the growth-inflation dynamics behave and we take this policy by policy.”
Sankar Chakraborti, MD and CEO, Acuité Ratings & Research, opined that the rate cut for corporates and households means that borrowing costs will further decline, benefiting sectors such as housing, auto finance and corporate lending. He noted that this could be the last rate cut in some time, with the end rate likely to be around 5%, followed by a longer pause unless inflation remains subdued and growth shows signs of slowing.
Crisil said in a report that it expects limited demand pressure on inflation, leaving policy room for rate cuts if growth surprises on the downside.
Published on December 5, 2025
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