In a move that surprised many observers, the Reserve Bank of India has reduced its key lending rate even as the economy posted strong growth in the second quarter.
On December 5, the central bank cut the repo rate by 25 basis points. This came shortly after data showed that India’s gross domestic product grew by a solid 8.2 percent in the second quarter of FY26. While some market watchers had expected a rate cut earlier, the strong growth numbers led to doubts over whether the decision would still go through.
Those doubts were cleared when the Monetary Policy Committee not only approved the rate cut but also lowered its inflation outlook. RBI Governor Sanjay Malhotra said the decision was guided by the rare mix of low inflation and high growth, which he described as a “Goldilocks” moment for the economy.
The RBI is also factoring in rising global uncertainties. Lower interest rates are expected to lead to cheaper loans for consumers and businesses. This could help sustain consumption after the festive season boost and also encourage companies that have been cautious about fresh investments due to geopolitical risks.
Soumya Kanti Ghosh, group chief economic advisor at a state run lender, called the MPC decision exceptional. “With GDP growth above 8.2 percent and an ultra low inflation of 0.25 percent, the rate cut is exceptional. Historical data of other countries reveals 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,” he said.
He also warned that tariff and trade uncertainties could weaken global demand, while prolonged geopolitical tensions and market volatility pose risks to the growth outlook.
A ratings agency said the rate cut reflects the broader fall in inflation across the economy. Food prices stayed below trend in September and October, while core inflation also eased. Consumer price inflation averaged 1.7 percent in the second quarter and dropped to a record low of 0.25 percent in October.
The RBI now expects inflation to ease from 2.2 percent in the first half of the current fiscal to 1.8 percent in the second half. For the next fiscal, it sees CPI inflation averaging 4 percent in the first half.
Alongside the rate cut, the RBI announced open market purchases of government securities worth Rs 1 lakh crore in December. It also introduced dollar rupee buy sell swaps of 5 billion dollars for the first time since March. These steps aim to inject long term liquidity into the system.
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