RBI cuts rate for India’s Goldilocks run: The Reserve Bank of India’s (RBI) monetary policy committee has lowered the repo rate by 25 basis points (bps) to 5.25% from 5.50%, RBI Governor Sanjay Malhotra said at a press conference. The central bank has now cut policy rates by a cumulative 125 bps during 2025.

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Keeping its monetary policy stance neutral, the governor cited rapid disinflation and resilient growth behind the “rare Goldilocks” period. He added that inflation, at a record low of 0.25% in October, provides room for policy maneuver, while economists anticipate a further rate cut towards a terminal 5%.

Growth up, inflation down: The RBI raised its FY 2026 GDP growth forecast to 7.3% from its previous estimate of 6.8%. The inflation forecast is also down to 2% from 2.6% in October. Disinflation has become broad-based due to favorable food-supply conditions, moderating global commodity prices, and adequate reservoir levels, Malhotra said.

On the INR depreciation: The central bank will tolerate a weaker currency but intervene to curb undue volatility. “We don’t target any specific price levels or bands. We let markets function; they are very deep and efficient. We just let the [INR] find its correct position, correct level,” Malhotra stated.

India’s forex reserves are at USD 686 bn, providing a healthy import cover of more than 11 months of imports.

External risks poke the bear: The RBI flagged downside risks from global conditions, but expects India to “comfortably” meet external financing needs.

Liquidity injection and currency swaps-

Liquidity boost: The RBI will buy government-bonds worth INR 1 tn (USD 11 bn) this month to inject liquidity into the banking system. It will also conduct a USD 5 bn INR-USD foreign-exchange swap, under which it will purchase USD and sell them back three years later, as it seeks to address tight liquidity following extensive currency-market intervention.

The governor stressed that the repo rate is the primary monetary-policy instrument, with open-market operations focused on liquidity management rather than influencing government-bond yields. The bond purchases are expected to offset cash drain caused by RBI’s USD sales to support a weakening INR, which has become Asia’s worst-performing currency this year.

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