The Reserve Bank of India (RBI) has done its best to ensure monetary policy continues to support India’s economic growth and it is now time for the markets to show maturity and remain non exuberant, SBI Research said in a report, as the central bank in an unprecedented move reduced repo rate when both GDP and inflation are congenial.
The RBI monetary policy committee unanimously voted to cut the repo rate by 25 bps amid uncertainties in a tumultuous global order. The RBI panel also maintained its neutral stance. With GDP growth above 8.2 per cent in the July-September 2025 quarter and ultra-low inflation of 0.25 per cent in October, the rate cut is “exceptional”, the SBI Research said in the report.
Historical data of other countries reveal that there have been minimal instances across the UK, China and Indonesia, where central banks have reduced their rates even when GDP growth was high, the report noted. However, all such cases of rate cuts were from very high interest rate levels, even as inflation was also much higher.
For example, it cited that the UK’s chancellor of the exchequer in the early 1970’s Anthony Barber, made a “dash for growth” by cutting rates when inflation was running at 11 per cent and growth at 12.5 per cent. Similarly, the Bank of Indonesia had cut successively during 1995-1997 prior to the Asian crisis when growth was running at 8.6 per cent and inflation at 7.4 per cent.
“Its only China that had cut in 2012 and 2015 when inflation was averaging 1.8 per cent and growth at 7.4 per cent,” the report read. On the inflation front, with continued lower food inflation, higher kharif production, healthy rabi sowing, adequate reservoir levels and conducive soil moisture, RBI has reduced inflation projection for 2025-26 to 2.0 per cent from the October estimate of 2.6 per cent and February estimate of 4.2 per cent.
“We forecast inflation for FY26 at 1.8 per cent and for FY27 at 3.4 per cent. With such unprecedented level of downward revisions and further prospects of downward revision looming large, the RBI has kept the door ajar for future rate decisions. However, for now, repo rate at 5.25 per cent will be lower for longer,” the SBI Research report read.
RBI has also revised real GDP growth for 2025-26 and is projected at 7.3 per cent now. Real GDP growth for Q1:2026-27 is projected at 6.7 per cent and Q2 at 6.8 per cent. “However, ongoing tariff and trade policy uncertainties will impact external demand for goods and services,” it noted. “Prolonged geopolitical tensions and volatility in international financial markets caused by risk-off sentiments of investors also pose downside risks to the growth outlook.”
SBI Research expects more than 7 per cent GDP growth in both Q3 and Q4, with 2025-26 growth at 7.6 per cent. RBI Governor Sanjay Malhotra on Friday characterised India’s current macroeconomic moment as a “rare goldilocks period”, which currently marks high economic growth and exceptionally low inflation. “The economy witnessed robust growth and benign inflation…We approach the new year with hope, vigour and determination to further support the economy and accelerate progress,” the central bank governor said.
