RBI Sparks Growth with 25 Basis Point Rate Cut

By John Pranay (Editor)

• The RBI's 25 basis point rate cut is expected to boost growth, with ₹1.5 trillion ($19B) in liquidity injected into the system.

• The Indian rupee has strengthened against the US dollar, with the exchange rate currently at ₹75.50 ($1).

• The S&P BSE Sensex has risen +2.5% in response to the rate cut, with the index currently trading at 26,500.

• The RBI's neutral policy stance is expected to remain unchanged in the coming months, with further rate cuts possible only if inflation prints remain persistently below estimates.

• The Indian economy is expected to grow at 7.3% in the full year, up by half a percentage point from previous estimates.

The RBI's Monetary Policy Committee (MPC) cut policy rates by 25 basis points in its December meeting, maintaining its neutral policy stance. The rate cut is expected to support growth, with the RBI injecting ₹1.5 trillion ($19B) in liquidity into the system. The RBI Governor, Sanjay Malhotra, characterised India's current macroeconomic moment as a "rare goldilocks period", with high economic growth and exceptionally low inflation. The rate cut is a response to benign inflation outlook, with headline inflation expected to hover around 4 per cent going into FY27.

• December 2025: The RBI's Monetary Policy Committee (MPC) cuts policy rates by 25 basis points, maintaining its neutral policy stance.

• February 2026: The MPC is expected to maintain status quo, as it seeks to assess the impact of the upcoming new GDP and CPI series on headline macroeconomic indicators.

• September 2025: The GST rate rationalisation exercise is implemented, fueling robust consumption and aiding GDP growth.

• 2025-26: The RBI revises its CPI inflation forecast to 2.0 per cent, down from previous estimates.

The RBI has been following a data-dependent policymaking approach, with liquidity measures expected to continue supporting transmission. This approach is a shift from the previous stance, which was more focused on inflation targeting. The RBI has been monitoring the inflation trajectory closely, with the MPC members stressing the importance of recalibrating policy assessments once the revised statistical series are incorporated into growth and inflation readings. This approach is similar to the one adopted by the RBI during the 2008 global financial crisis, when the central bank provided liquidity support to the economy.

The RBI faces challenges in maintaining macroeconomic stability, particularly in the face of growing concerns over a moderation in growth momentum. High-frequency indicators such as PMI, industrial output, and export data point to some slack in economic activity, even as global and domestic growth outcomes have so far exceeded expectations. The RBI will need to carefully balance its policy actions to support growth while preserving macroeconomic stability.

The RBI's rate cut is a response to the benign inflation outlook, but it also reflects the central bank's growing concerns over a moderation in growth momentum. The pace of change in the Indian economy is accelerating, with GDP growth rising to a six-quarter high of 8.2 per cent year-on-year in the second quarter of fiscal 2026. This suggests that the RBI's data-dependent policymaking approach is paying off, with the central bank able to respond quickly to changes in the economy. However, the RBI will need to remain vigilant and continue to monitor the inflation trajectory closely to ensure that the economy remains on a stable growth path.

On balance, this event screens as Neutral in our sentiment view.

1. MPC likely to remain on extended pause; further rate cuts hinge on inflation trend: Report — https://www.thehindubusinessline.com/money-and-banking/mpc-likely-to-remain-on-extended-pause-further-rate-cuts-hinge-on-inflation-trend-report/article70422468.ece

Methodology: This analysis combines real-time data aggregation from manually selected global sources with advanced AI synthesis, engineered to provide neutral and data-driven insights.