The Reserve Bank of India on Friday sharply revised its forecasts by 50 bps for growth and 60bps for inflation on Friday. It projected a 7.3% growth for FY26 and lowering inflation expectations to 2% for the year—well below the 4% target. Announcing the outcome of the Monetary Policy Committee (MPC) meeting, RBI Governor Sanjay Malhotra said the benign inflation outlook on both headline and core continues to provide policy space to support growth. Against this backdrop, the MPC unanimously voted to cut the policy repo rate by 25 basis points to 5.25% while retaining the neutral stance.
Since the October review, inflation has eased at a pace not seen in the flexible inflation targeting era. For the first time since the framework was adopted, average inflation for an entire quarter fell below the lower tolerance limit, coming in at 1.7% in Q2. It dropped further to 0.3% in October, driven largely by a correction in food prices that was contrary to the usual September–October trend.
Real GDP
Even as inflation moderated sharply, the economy posted robust growth. Real GDP expanded 8.2% in Q2 on the back of a strong festive season and the recent rationalisation of GST rates that increased spending. With inflation averaging 2.2% and growth averaging 8% in the first half, Malhotra said the economy was experiencing a “rare goldilocks period” of high growth and low prices.
Cautioning against over-interpreting the October print, Malhotra said, “Certainly 0.2% is not the right level of inflation… there are going to be fluctuations and volatility. Some of the impact is because of base effects. But the underlying inflation is on the lower side and that’s why we have this rate cut.”
High-frequency indicators show economic activity holding up in the October–December period, though some areas are losing momentum. Manufacturing PMI eased to a nine-month low of 56.6 in November, IIP growth slowed sharply to 0.4% in October from 4.6% in September, and construction indicators recorded modest expansion—steel consumption rose 2.4% and cement output 5.3%. Electricity demand remained in contraction in November. RBI expects growth at 7% in Q3 and 6.5% in Q4. For Q1 and Q2 of the next financial year, growth to 6.7% and 6.8% in Q1 and Q2 of next year.
RBI guv on domestic demand
Despite these mixed signals, Malhotra said domestic demand remains well anchored. “Rural demand continues to be robust while urban demand is recovering steadily. Investment activity remains healthy.” Agriculture is expected to hold strong owing to a healthy kharif harvest, higher reservoir levels and improved rabi sowing. Manufacturing continues to improve, while services growth remains steady.
On the external front, demand remains weak. Merchandise exports saw a sharp decline in October amid soft global conditions, while services exports, though resilient, also softened. Malhotra said external uncertainties pose risks, but progress in trade and investment negotiations could provide upside.
Market participants welcomed the policy move. Rajiv Anand, Managing Director and CEO at IndusInd Bank, said the MPC had used the “space for easing created by CPI inflation slipping to a record low.” With inflation for the year now expected to average 2%, he said the decision reiterates the primacy of a rules-based framework even as growth projections have been revised higher. He added that a neutral stance suggested future rate action would remain data-dependent, though space for further easing exists.
On the inflation outlook, Malhotra said the faster-than-expected decline was led by food price correction. Excluding gold, core inflation fell to 2.6% in October. “Overall, the decline in inflation has become more generalised,” he said.
Food supply conditions, he noted, have improved significantly, supported by healthy kharif output, favourable rabi sowing, adequate reservoirs and good soil moisture. RBI projects CPI inflation at 0.6% in Q3 and 2.9% in Q4. For the next financial year, Q1 and Q2 inflation are projected at 3.9% and 4%. Underlying pressures are even lower, as the recent rise in precious metal prices accounts for about 50 basis points.
Economists remain cautious. “We expect inflation to remain below 4% in FY26 and FY27,” HSBC Global Investment Research said in a note. “We believe growth is strong now, but will soften by the March quarter due to fiscal tightening, weaker exports, and the GST boost fading. Fiscal policy will remain tight in a world of fiscal intolerance, and the onus for supporting growth will fall on the RBI.”
Adding to the rate path debate, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said they do not rule out another 25-basis point cut, with the likely terminal rate at 5% followed by a prolonged pause.
