Emerging signs of a slowdown in economic momentum prompted members of the Monetary Policy Committee (MPC) to unanimously back a 25-basis-point cut in the policy repo rate at the December meeting, even as headline inflation fell to a record low and growth in the first half of FY26 remained strong, according to minutes released on Friday. While India posted a robust 8.2% GDP growth in Q2 FY26 (July–September), MPC members cautioned that the momentum may have peaked, with several high-frequency indicators pointing to a loss of traction in October amid rising global and trade-related uncertainties. The MPC voted unanimously to reduce the repo rate by 25 bps to 5.25%.
Reserve Bank of India Governor Sanjay Malhotra noted that domestic growth remained resilient but showed early signs of deceleration in the second half of the year. “Considering the benign inflation outlook – headline as well as core – real interest rates need to be lower. Therefore, I vote for a 25-bps rate cut. This will also stimulate demand and be growth-supportive,” he said.
Concerns over growth moderation were reflected in recent data. Industrial output slowed to a 14-month low in October, manufacturing PMI eased, and merchandise exports contracted by around 12%, underscoring the impact of weakening external demand and geopolitical uncertainties. Members flagged that trade disruptions, particularly stemming from US tariffs, could weigh on labour-intensive sectors and micro, small and medium enterprises (MSMEs).
MPC member Nagesh Kumar described the recent period as a “goldilocks moment” of high growth and low inflation, but warned that the window may be closing. He pointed to slowing manufacturing growth, contracting exports, and softening business sentiment as evidence that economic activity may have peaked in Q2.
With inflation far below the lower bound of the flexible inflation targeting framework, Kumar argued that inflation was “too low” for a developing economy and indicative of a demand deficit.
Is 0.3% Inflation Too Low for India?
Similar concerns were echoed by MPC member Saugata Bhattacharya, who said growth projections suggested a gradual deceleration ahead. External risks, especially related to trade and exports, warranted close monitoring, he noted. With transmission of earlier rate cuts now largely complete and bank credit flows improving, Bhattacharya said further easing could support credit demand, particularly among MSMEs, and complement ongoing fiscal and regulatory measures.
Professor Ram Singh made one of the strongest cases for immediate easing, arguing that real interest rates remained “unnecessarily high” despite cumulative cuts of 100 bps over the past year. He warned that delaying action could hurt growth by prolonging the low-inflation phase, squeezing corporate margins, and dampening private investment, especially among small businesses. Singh also flagged that low inflation raises the real burden of debt and can deter investment decisions. While he backed a 25-bps cut in the repo rate, Singh argued for a shift in stance to “accommodative” to better support growth.
On the rupee, Singh acknowledged that a rate cut could add to depreciation pressures but said strong macro fundamentals would keep such pressures self-limiting. He added that low global oil and commodity prices would limit the risk of imported inflation.
External Shocks
RBI Executive Director and MPC member Indranil Bhattacharyya highlighted that while growth in H1FY26 surprised on the upside, external headwinds — including weak global trade and US tariff-related uncertainties — were likely to weigh on the outlook. With growth projected to moderate to around 6.8% in the coming quarters, he said calibrated easing was consistent with the MPC’s mandate and commitment to the 4% inflation target.
Deputy Governor and MPC member Poonam Gupta said the sharp and faster-than-expected moderation in inflation provided clear policy space to support growth. With inflation projected to remain below target for at least nine more months, she said there were no signs of overheating in the economy. On global uncertainties, Gupta said that no new shocks have emerged. “One could perhaps safely conclude that the global uncertainties have peaked,” she said.