RBI trims rates, adds liquidity, says economy in ‘rare goldilocks period’

The Reserve Bank of India (RBI) on Friday cut the benchmark interest rate for the first time in six months and announced fresh liquidity measures as Governor Sanjay Malhotra described the current mix of low inflation and strong growth as a “rare goldilocks period”.

The six-member monetary policy committee, led by Malhotra, voted unanimously to reduce the repo rate by 25 basis points to 5.25 per cent, while retaining a neutral stance that keeps open the possibility of further cuts.

In doing so, the RBI appeared to set aside concerns over the rupee, which breached 90 to a dollar this week. The currency is down almost 5 per cent against the dollar this year, making it the worst performer in Asia.

Friday’s reduction marks the fourth rate cut since February 2025. The central bank had held rates in its August and October policy reviews. Based on earlier MPC recommendations, the RBI had trimmed the repo rate by 25 basis points each in February and April and by 50 basis points in June, helped by easing retail inflation.

“Inflation at a benign 2.2 per cent and growth at 8.0 per cent in H1:2025-26 present a rare goldilocks period,” Malhotra said while announcing the policy decisions.

The RBI lowered its inflation projection for the fiscal year ending March to 2 per cent, from 2.6 per cent, and raised its GDP growth forecast to 7.3 per cent, compared with 6.8 per cent earlier. Malhotra said that while growth remained strong, rapid disinflation since October had pushed inflation below the lower end of the central bank’s tolerance band.

“The growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum,” he said. “Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience and is poised to register high growth. The headroom provided by the inflation outlook has allowed us to remain growth supportive.”

He added that the RBI would continue to meet the productive requirements of the economy in a proactive manner while ensuring macroeconomic stability.

The Indian economy has also been hit by a sharp drop in exports after US President Donald Trump imposed a 50 per cent tariff on goods from India.

To support liquidity and strengthen transmission of lower rates, the RBI said it would conduct open market bond purchases of ₹1 lakh crore this month and undertake USD 5 billion in forex swaps.

Radhika Rao, Executive Director and Senior Economist at DBS Bank, said the RBI had delivered on expectations by cutting rates and announcing steps to ease liquidity and avoid a rise in borrowing costs.

“The policy decision was likely dictated by a higher weightage given to below-target inflation, which had provided a sizeable real rate buffer. Backing the move, inflation forecasts were lowered, while growth numbers were marked-to-market given the strong 1HFY26 momentum,” she said.

Anitha Rangan, Chief Economist at RBL Bank, said that while the repo cut added pressure on the currency, the forex swap showed that the RBI was aware of currency risks.