The monetary policy committee has now cut the repo rate by a total of 125 basis points since February to 5.25%. It held rates in August and October. The policy stance was retained at neutral.
The growth-inflation balance, especially the benign inflation outlook onboth headline and core, continues to provide the policy space to support the growthmomentum, RBI Governor Sanjay Malhotra said. “Accordingly, the MPC unanimously voted to reduce the policy repo rate by25 bps to 5.25 per cent.”
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The Indian economy is facing a “rare goldilocks” period, Malhotra said. Since October, Indian economy has seen rapid disinflation leading to a breach of the central bank’s lower threshold of tolerance, he said, adding that growth had remained strong.
ALSO READ: RBI MPC at a glance: Your one-stop guide for all key decisions”Contrary to earlier expectations, global growth has been relatively strong. The evolving geopolitical and trade environments, however, continue to weigh on the outlook.””Inflation paths remain divergent with headline inflation remaining above target in most advanced economies, while pressures in most emerging markets are contained, providing room for accommodative monetary policy. Conflicting pulls and pressures from AI-fuelled optimism and concerns over high valuations are playing outin global equity markets, while divergence in the monetary policy trajectory of central banks is adding to the uncertainty on capital flows and yield spreads.”
Friday’s move was one of the trickiest for the RBI in recent months as it balanced competing priorities. The economy expanded more than 8% last quarter, although exports have plunged. At the same time, inflation weakened to 0.25% in October, largely because of falling food prices, although it may rebound next year as favorable base effects fade.
India’s growth momentum
The central bank raised its GDP forecast for the current year to 7.3% from its previous estimate of 6.8% while the inflation projection was lowered to 2% versus 2.6% in October. The South Asian economy expanded at a sharper-than-expected clip of 8.2% in the July-September quarter but growth is expected to slow as the full impact of up to 50% tariffs imposed by the U.S. hit exports and sectors from textiles to chemicals.
External uncertainties could pose “downside risks” to growth, Malhotra said.
Inflation at an all time low
On the other hand, retail inflation stood at an all-time low of 0.25% in October and is expected to remain soft in coming months. The central bank targets inflation at 4%, within a tolerance band of 2% on either side.
“Underlying inflation pressures are even lower”, Malhotra said, pointing to a “generalised” decline in price pressures.
“Despite an unfavorable and challenging external environment, the Indian economy has shown remarkable resilience,” the governor said. “The headroom provided by the inflation outlook has allowed us to remain growth supportive.”