As expected, the Reserve Bank of India (RBI), in its second monetary policy committee (MPC) meeting for 2025, decided to cut the repo rate, the central bank's rate for short-term loans to banks, by 25bps (basis points) to 5.25% from 5.5%. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) is adjusted to 5.00%, and the marginal standing facility (MSF) rate and the bank rate are set at 5.50%. RBI also revised its real gross domestic product (GDP) growth forecast for FY25-26 to 7.3% from 6.8%.
RBI governor Sanjay Malhotra, who chaired the monetary policy committee (MPCC) meeting, announced the decision of the six-member panel. "The growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum. Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25bps to 5.25%. The MPC also decided to continue with the neutral stance."
In view of the evolving liquidity conditions and the outlook, RBI has decided to conduct open market operations (OMO- a central bank monetary policy tool), purchases of government securities of ₹100,000 crore and a 3-year US dollar and Indian rupee buy-sell swap of US$5bn (billion) this month to inject durable liquidity into the system, the governor says.
According to Mr Malhotra, the MPC noted that headline inflation has eased significantly and is likely to be softer than the earlier projections, primarily due to exceptionally benign food prices. "Reflecting these favourable conditions, the projections for average headline inflation in FY25-26 and the first quarter (Q1)FY26-27 have been further revised downwards."
"Core inflation, which had been rising steadily since Q1FY24-25, eased at the margin in Q2FY25-26 and is expected to remain anchored in the period ahead. Both headline and core inflation are expected to be at or below the 4% target during the first half (H1) of FY26-27. The underlying inflation pressures are even lower as the impact of the increase in the price of precious metals is about 50bps. Growth, while remaining resilient, is expected to soften somewhat," the RBI governor says.
Real gross domestic product (GDP) registered a six-quarter high growth of 8.2% in Q2FY25-26, underpinned by resilient domestic demand amidst global trade and policy uncertainties.
On the supply side, RBI says real gross value added (GVA) expanded by 8.1%, aided by buoyant industrial and services sectors. Economic activity during the first half of the financial year benefited from the rationalisation of income tax and goods and services tax (GST), softer crude oil prices, the front-loading of government capital expenditure, and facilitative monetary and financial conditions supported by benign inflation.
High-frequency indicators suggest that domestic economic activity is holding up in Q3, although there are some emerging signs of weakness in a few leading indicators. GST rationalisation and festival-related spending supported domestic demand during October-November. Rural demand continues to be robust while urban demand is recovering steadily. Investment activity remains healthy with private investment gaining steam on the back of expansion in non-food bank credit and high-capacity utilisation. Merchandise exports declined sharply in October, amid subdued external demand, and were accompanied by softer services exports. On the supply side, agricultural growth is supported by healthy kharif crop production, higher reservoir levels and better rabi crop sowing. Manufacturing activity continues to improve, while the services sector is maintaining a steady pace.
Looking ahead, 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. External uncertainties continue to pose downside risks to the outlook, while the speedy conclusion of various ongoing trade and investment negotiations presents upside potential.
Taking all these factors into consideration, RBI projects real GDP growth for FY25-26 at 7.3%, with Q3 at 7.0% and Q4 at 6.5%. Real GDP growth for Q1FY26-27 is projected at 6.7% and Q2 at 6.8%, the central bank says.
In October, headline CPI inflation declined to an all-time low. "The faster than anticipated decline in inflation was led by correction in food prices, contrary to the usual trend witnessed during the months of September-October. Core inflation (CPI headline excluding food and fuel) remained largely contained in September-October, despite continued price pressures exerted by precious metals. Excluding gold, core inflation moderated to 2.6% in October. Overall, the decline in inflation has become more generalised.”
Turning to the inflation outlook, 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, RBI projected CPI inflation for FY25-26 at 2.0% with Q3 at 0.6% and Q4 at 2.9%. CPI inflation for Q1FY26-27 and Q2 is projected at 3.9% and 4.0%, respectively. The underlying inflation pressures are even lower as the impact of the increase in price of precious metals is about 50bps, the RBI governor says.
According to the central bank, India’s current account deficit (CAD) moderated from 2.2% of GDP in Q2FY24-25 to 1.3% in Q2FY25-26 on robust services exports and strong remittances. In October 2025, merchandise exports contracted year-on-year, whereas merchandise imports continued to increase for the second consecutive month, resulting in a widening of the trade deficit. Healthy service exports, coupled with strong remittance receipts, are expected to keep CAD modest during FY25-26, it added.
On the external financing side, RBI says gross foreign direct investment (FDI) to India increased at a robust pace during the first half of the year. "Net FDI also increased significantly due to a decline in repatriation despite a rise in outward FDI. Foreign portfolio investment (FPI) to India recorded net outflows of US$0.7bn in FY25-26 from April to December 2025, due to outflows in the equity segment. Flows under external commercial borrowings and non-resident deposit accounts moderated as compared to last year. As of 28 November 2025, India’s foreign exchange reserves stood at US$686.2bn, providing a robust import cover of more than 11 months."
Commenting on liquidity, Mr Malhotra, the RBI governor says system liquidity, as measured by the net position under the LAF, stood at an average surplus of ₹150,000 crore for the period since the MPC last met in October 2025. "We continuously assess the durable liquidity requirements of the banking system due to changes in currency in circulation, forex operations, and reserve maintenance."
"After reviewing the liquidity situation and the outlook, we have decided to conduct OMO purchases of government securities amounting to ₹100,000 crore and 3-year US dollar and India rupee buy-sell swaps of US$5bn this month. These measures will ensure adequate, durable liquidity in the system and further facilitate monetary transmission," Mr Malhotra says.
The RBI governor says the central bank has been intensifying efforts to strengthen customer services, citing initiatives such as streamlined re-know-your-customer (re-KYC) processes, financial inclusion drives and the 'aapki poonji, aapka adhikar' campaign. He noted that over 99.8% of applications are now disposed of within stipulated timelines, supported by online service delivery and monthly disclosures of pendency data.
However, Mr Malhotra flagged a recent rise in complaints, which has increased the workload at the RBI's banking ombudsman. Urging regulated entities to 'keep customers at the centre' of their operations and reduce grievances, he announced a two-month campaign from 1st January aimed at clearing all complaints pending for more than a month and called for full cooperation from all regulated entities to achieve this.
