Reserve Bank of India (RBI) Governor Sanjay Malhotra on Friday delivered what the markets and economists were expecting: A further 25 percent interest rate cut, taking the repo rate down to 5.25 percent, with retail inflation at an “unprecedented low level”.
This latest policy action, in all likelihood, ensures that we could see in more rate cuts in FY26 and possibly even the end of the easing of the rate cycle. The RBI has lowered rates by 125 basis points in 2025, but had kept rates on hold until Friday’s decision.
“Since the October policy, the Indian economy has witnessed rapid disinflation, with inflation coming down to an unprecedentedly low level,” Malhotra said in the governor’s statement issued on the RBI website.
The RBI also took action to improve the liquidity situation in the system. “In view of the evolving liquidity conditions and the outlook, the RBI has decided to conduct OMO (open market operations) purchases of government securities of ₹1,00,000 crore and a three-year dollar-rupee Buy Sell swap of five billion this month to inject durable liquidity into the system,” Malhotra said. The OMO structure involves the purchase and sale of government securities in the open market to manage liquidity and regulate the money supply.
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The RBI’s Monetary Policy Committee also observed that headline inflation has eased significantly and is likely to be softer than the earlier projections, due to exceptionally benign food prices.
Anubhuti Sahay, head, India economic research at Standard Chartered Bank, tells Forbes India: “A 25 basis points cut along with an OMO announcement will help the economy, but more importantly, it soothes nerves in the rates market. Sharp moves in foreign exchange and in the rates market would have been undesirable.”
However, opinion was divided on what the RBI would do. The reason was because it will need to watch as the transmission of the existing actions is still unfolding and to see how the India-US trade deal uncertainties play out.
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India’s retail inflation has fallen to a historic low of 0.25 percent in October, aided by low food prices and the base effect. The depreciating rupee, which hit an intra-day low of 90.43 to the dollar on December 4, has been subdued due to foreign fund outflows and uncertainty over the proposed India-US trade deal. The rupee pulled back to 89.8 to the dollar in morning trade on December 5.
Vikas Garg, head of fixed income at Invesco Mutual Fund, says, “Forward-looking inflation appears comfortable, with 2QFY26 projected at 4 percent, which could open up space for one more rate cut. However, the growth trajectory remains the key factor.”
He also welcomed the OMO action to ease banking liquidity. “With this approach, we expect more OMO announcements and foreign exchange swaps going forward. Overall, this is a dovish and market-supportive policy action, expected to drive yields lower,” he tells Forbes India.
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With much of the action done from the RBI’s end, the market observers will wait to see how the India-US trade deal takes place at the earliest, which might give a boost to the rupee. The focus will also be on the sustainability of positive festival demand data and a further improvement in credit growth to see how the economic recovery will play out.
Life is not a template and neither is mine. Like several who have worked as journalists, I am a generalist in my over two decade experience across print, global news wires and dotcom firms. But there
