After a brief pause, the RBI on Friday resumed monetary easing, reducing the repo rate by 25 basis points to 5.25 percent, the lowest in over three years. Analysts expected the central bank to hold fire amid robust growth in the July-September quarter, but the RBI reminded that monetary policy is rarely a rearguard action and more a forward march.
As a rate change is transmitted with a lag, the reduction is perhaps a sign of an anticipated subdued macroeconomic environment, at least in the first few months of 2026. Former Governor Raghuram Rajan noted that we can either have low rates or low inflation, not both. But that’s exactly what’s happening now. With the central bank keeping the door open for further cuts, the question is how much room does it have? The markets are factoring in 5-5.25 percent as the likely floor this fiscal, though it’s likely to see sub-4 percent in 2026-27.
The RBI also announced Rs 1 lakh crore of open market operations and $5 billion in forex swaps to smoothen liquidity and strengthen credit transmission. The dovish pivot is much-needed to support bond yields, which have been under pressure. Meanwhile, the central bank revised the 2025-26 real GDP growth estimate up to 7.3 percent from 6.8 percent projected earlier, besides trimming the inflation outlook to 2 percent from 2.6 percent. As Governor Sanjay Malhotra noted, the first half of this fiscal ended with an impressive 8 percent growth and 2.2 percent inflation. With sustained rural spending, urban demand rebound, and rising private investments, Malhotra decided to unlock a rare ‘Goldilocks’ phase to goose the economy.
One argument in favour of cuts was that the real rates are at a decadal high of over 5 percent. As an analyst pointed out, strong nominal GDP growth is essential because only when the nominal momentum improves, demand expands, pricing power stabilises, and companies deliver profits. Therefore, a nominal growth boost is needed to strengthen balance sheets, improve earnings, and reinforce India’s broader growth cycle. Friday’s rate cut nudges the economy in that direction, even though it failed to charm the currency markets.
The rupee, which opened at 89.69 against the US dollar anticipating a status quo, appreciated to 90.07 soon after the announcement. So far this year, the rupee has fallen over 5 percent to emerge as Asia’s worst-performing currency. After inflation, it’s now one of RBI’s major balancing concerns.