The Reserve Bank of India cut the repo rate to 5.25% amid strong economic growth and exceptionally low inflation, a move
hailed as exceptional by SBI Research. This decision, supported by a unanimous Monetary Policy Committee vote, aims to
sustain India's economic momentum. The central bank anticipates continued growth and low inflation, though external
factors pose potential risks.
The Reserve Bank of India (RBI) slashed the repo rate by a quarter point to 5.25% on Friday, at a time when the economy
is growing strongly and inflation remains exceptionally low. SBI, in its latest report hailed the decision hailed as
“exceptional" and said that the central bank had played its role in ensuring that the monetary policy continues to
support the country's economic growth. The bank further added added that it was now up to the markets to remain
disciplined and avoid overreaction. The RBI’s Monetary Policy Committee voted unanimously to reduce the repo rate while
maintaining a neutral stance. The cut comes amid global uncertainty, even as India’s GDP expanded by over 8.2% in the
July–September 2025 quarter and inflation slipped to just 0.25% in October. SBI Research noted that such a move is rare
internationally. “Historical data of other countries reveal that there have been minimal instances across the UK, China
and Indonesia, where central banks have reduced their rates even when GDP growth was high,” the report said. In past
cases, these cuts were typically made from higher interest rate levels and during periods of higher inflation. The
report cited the UK in the early 1970s, when chancellor Anthony Barber enacted a “dash for growth” by cutting rates
despite inflation at 11% and growth at 12.5%. Similarly, Indonesia cut rates successively from 1995 to 1997, with growth
at 8.6% and inflation at 7.4% prior to the Asian financial crisis. “Its only China that had cut in 2012 and 2015 when
inflation was averaging 1.8% and growth at 7.4%,” the report added. India’s downward inflation trajectory is supported
by lower food prices, strong kharif production, healthy rabi sowing, adequate reservoir levels, and favourable soil
moisture. As a result, the RBI has revised its inflation forecast for 2025–26 to 2.0 %, down from 2.6% in October and
4.2% in February. “We forecast inflation for FY26 at 1.8% and for FY27 at 3.4%. With such unprecedented level of
downward revisions and further prospects of downward revision looming large, the RBI has kept the door ajar for future
rate decisions. However, for now, repo rate at 5.25% will be lower for longer,” SBI Research said. The central bank also
adjusted its GDP projections, with real growth for 2025–26 now seen at 7.3%. The first and second quarters of 2026–27
are projected at 6.7% and 6.8% respectively. SBI Research cautioned, however, that external demand could be affected by
“ongoing tariff and trade policy uncertainties,” and that “prolonged geopolitical tensions and volatility in
international financial markets caused by risk-off sentiments of investors also pose downside risks to the growth
outlook. ” Despite these headwinds, the report expects GDP growth above 7% in the third and fourth quarters, bringing
full-year growth for 2025–26 to 7.6%. Commenting on the policy decision, RBI Governor Sanjay Malhotra described India’s
current economic climate as a “rare goldilocks period,” with strong growth and low inflation. “The economy witnessed
robust growth and benign inflation...We approach the new year with hope, vigour and determination to further support the
economy and accelerate progress,” he said.