Reserve Bank of India's Monetary Policy Committee cuts repo rate by 25 basis points to three-year low of 5.25%

With today's cut, the rate-setting panel has delivered a cumulative 125 basis points repo rate cut in the ongoing financial year.

Friday’s rate cut came after the MPC maintained a pause in cuts in the last two policy meetings.

The MPC unanimously decided to cut the repo rate and maintained its neutral stance on the back of lower inflation and the strong growth the Indian economy witnessed during the second quarter of the current financial year.

Governor Malhotra noted that the Indian economy witnessed rapid disinflation, and the inflation target dropped below its lower tolerance band for the first time since the RBI was mandated with the task of inflation targeting.

"The Indian economy has witnessed rapid disinflation, with inflation coming down to an unprecedentedly low level. For the first time since the adoption of flexible inflation targeting (FIT), average headline inflation for a quarter at 1.7% in Q2:2025-26 breached the lower tolerance threshold (2%) of the inflation target (4%). It dipped further to a mere 0.3% in October 2025," Governor Malhotra said before announcing the rate cut.

With a high economic growth rate and low inflation, Governor Malhotra said that the current economic scenario presents a "Goldilocks period".

"Real GDP growth accelerated to 8.2% in Q2, buoyed by strong spending during the festive season, which was further facilitated by the rationalisation of the goods and services tax (GST) rates. Inflation at a benign 2.2% and growth at 8.0% in H1:2025-26 present a rare Goldilocks period," the governor said.

Meanwhile, in view of evolving liquidity conditions and the outlook, the Reserve Bank has decided to conduct open market operations (OMO) purchases of government securities of ₹1,00,000 crore and a 3-year USD/INR buy-sell swap of $5 billion this month to inject durable liquidity into the system, Governor Malhotra added.

Inflation and GDP growth targets

RBI expanded its economic growth forecast to 7.3% for the current financial year from its earlier projection of 6.8% in the backdrop of GST rationalisation, benign inflation, healthy balance sheets of corporates and financial institutions and congenial monetary and financial conditions.

"Domestic factors such as healthy agricultural prospects, continued impact of GST rationalisation, benign inflation, healthy balance sheets of corporates and financial institutions and congenial monetary and financial conditions should continue to support economic activity. Continuing reform initiatives would further facilitate growth. On the external front, services exports are likely to remain strong, while merchandise exports face some headwinds," the governor said in a statement.

"External uncertainties continue to pose downside risks to the outlook, while a speedy conclusion of various ongoing trade and investment negotiations presents upside potential. Taking all these factors into consideration, real GDP growth for 2025-26 is projected at 7.3%, with Q3 at 7.0% and Q4 at 6.5%. Real GDP growth for Q1:2026-27 is projected at 6.7% and Q2 at 6.8%. The risks are evenly balanced," the governor said.

Governor Malhotra added that inflation is likely to be softer than earlier anticipated, mainly on account of the fall in food prices. The central bank has pegged the inflation target at 2% for the current financial year.

"Food supply prospects have improved on the back of higher kharif production, healthy rabi sowing, adequate reservoir levels and conducive soil moisture. Barring some metals, international commodity prices are likely to moderate going forward. Overall, inflation is likely to be softer than what was projected in October, mainly on account of the fall in food prices. Considering all these factors, CPI inflation for 2025-26 is now projected at 2.0%," Governor Malhotra said.