In a move that underscores the complex economic crosscurrents facing India, the Reserve Bank of India's Monetary Policy Committee (MPC) has chosen growth support over caution, cutting the benchmark repo rate by 25 basis points to 5.25%. This decision, announced after the 3-5 December meeting, strikes a delicate balance between record-low inflation, a robust GDP expansion, and a weakening currency.
The primary driver for the easing remains unequivocal: inflation is firmly in check and significantly undershooting the RBI's 4% medium-term target. The MPC has projected inflation for FY26 at a mere 2%, revised down from 2.6% earlier. With price pressures dormant, the central bank saw a clear window to provide a calibrated boost to the economy.
RBI Governor Sanjay Malhotra had telegraphed this shift last month, noting there was "definitely scope" for rates to come down, after holding them steady in the past two policy reviews. The majority of economists surveyed by Bloomberg anticipated this quarter-point cut, viewing subdued inflation as an overriding factor.
The rate cut comes alongside a substantial upward revision in the RBI's growth forecast. The MPC now expects India's GDP to grow at 7.3% in the current fiscal year, a sharp upgrade from the previous estimate of 6.8%. This optimism is buoyed by recent official data showing the economy's resilience in the face of global headwinds, including significant US tariffs.
The decision signals the RBI's confidence in the domestic economy's momentum and its intent to nurture the ongoing growth cycle. By lowering borrowing costs, the central bank aims to stimulate investment and consumption, ensuring that the positive growth trajectory is sustained.
However, the decision was far from one-sided. Powerful arguments for a pause existed, as forecast by institutions like Citigroup, Standard Chartered, and the State Bank of India. The Indian rupee has been under intense pressure, plummeting to a record low below 90 against the US dollar. A rate cut, by diminishing the yield advantage for foreign investors, can potentially add downward pressure on the currency, complicating macro-financial stability.
The MPC's choice to cut despite this vulnerability suggests it views growth and inflation dynamics as more immediate priorities for now, while likely relying on the RBI's forex interventions to manage excessive currency volatility. The committee's decision to maintain a "neutral" monetary policy stance provides it with future flexibility to move in either direction as these competing risks evolve.
Today's policy is a nuanced gamble. The RBI is betting that the benefits of supporting a strong growth phase with low inflation outweigh the risks from external sector strain and global uncertainty. It reflects a central bank navigating a multi-front challenge: fostering domestic demand without igniting inflationary sparks or destabilizing the currency.
The success of this calibrated easing will depend on the evolving interplay of these factors. If global markets stabilize and the rupee finds a footing, the cut will be seen as a timely boost. However, if external pressures intensify, the MPC's balancing act will become even more challenging in the months to come. For now, the message is clear: growth has the upper hand, but the RBI remains vigilantly poised to respond to shifting economic tides.
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