Reserve Bank of India Governor Sanjay Malhotra said the Indian economy is facing a “rare goldilocks” period while announcing a cut in interest rate by 25 basis points.

A further easing is on the cards as inflation is expected to remain benign. The RBI is looking to boost banking-sector liquidity by up to $16 billion to support growth.

Citing a rare window of low inflation and strong growth, Malhotra said “policy space” exists to support growth.

India’s retail inflation hit an all-time low of 0.25% in October and is expected to remain ‘cool’ in the coming months. India’s GDP growth stayed strong at 8.2% in the July-September quarter, but faces pressure from a stiff tariff of 50% imposed by the US on Indian goods.

The RBI's six-member monetary policy committee (MPC) voted unanimously to reduce the policy repo rate to 5.25% and decided to continue with a ‘neutral’ stance.

The repo rate has fallen by 125 basis points since February this year, starting a new easing rate cycle with a pause in the August and October monetary policy.

In a bid to ease liquidity and speed up transmission of lower rates, the RBI has decided to conduct open market operations of Rs 1 lakh crore ($11.14 billion) to buy bonds this month. An additional $5 billion will be in forex swaps.

Economists feel the RBI has left room for a further rate cut, particularly in the absence of a trade deal and if the inflation forecast remains in line with expectations.

“The substantial downward revision in RBI’s inflation forecast suggests that space for further rate cuts remain intact, if the recent growth momentum shows signs of faltering ahead. The February policy remains live in terms of further rate cuts and liquidity injections, particularly if the current pace of forex intervention continues in the absence of a trade deal,” said Sakshi Gupta, principal economist at HDFC Bank.

Some economists believe the RBI may draw a red line after injecting another rate cut of 25 basis points. “With RBI continuing to leave room open for further easing, we do not rule out another 25bps cut, with the likely terminal rate at 5% followed by a prolonged pause," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

GDP growth revised upwards

The RBI raised its GDP forecast for FY26 to 7.3% from its earlier estimate of 6.8%. This revision was expected, after the Indian economy reported a stronger-than-expected growth of 8.2% in the fiscal second quarter.

Inflation projection lowered

The central bank has lowered its inflation projection for FY26 to 2%, from 2.6% estimated in October.

Malhotra said there is a “generalised” decline in price pressures.

The 3-day MPC meeting ending 5 December also came in the wake of concerns raised over a weakening rupee, which breached the 90 level to a dollar for the first time on 3 December.