Malhotra Announces 25 Basis Points Rate Cut and Rs 1.5 Lakh Crore Liquidity Infusion
The Reserve Bank of India (RBI) has made a significant move by cutting the policy repo rate by 25 basis points, bringing it down to 5.25%. This decision, announced during the Monetary Policy Committee meeting, comes alongside an optimistic revision of the GDP growth forecast for FY26, which has been increased to 7.3% from the previous estimate of 6.8%. Additionally, the RBI has lowered its inflation forecast to 2%, signaling a positive outlook for the Indian economy.
Rate Cut and Economic Outlook
In a notable shift, the RBI’s recent decision marks the first rate cut since February 2025. The repo rate reduction aims to stimulate economic activity as inflation has stabilized within the target range of 2% to 4%. Despite global trade tensions, domestic growth remains robust. The RBI’s revised GDP growth projection for 2025-26 is now set at 7.3%, an increase from the earlier forecast of 6.8%. The quarterly growth estimates have also been adjusted, with expectations of 7% for the third quarter and 6.5% for the fourth quarter. For the upcoming financial year, growth is projected at 6.7%, with the second quarter estimated at 6.8%.
Inflation Projections and Economic Drivers
The RBI has revised its Consumer Price Index (CPI) inflation forecast for 2025-26 to 2%, down from the previous estimate of 2.6%. This adjustment is attributed to easing food prices, which have played a significant role in the inflation landscape. The quarterly inflation projections now stand at 0.6% for the third quarter, 2.9% for the fourth quarter, and 3.9% for the first quarter of 2026-27. RBI Governor Sanjay Malhotra emphasized that inflation pressures are lower than anticipated, with recent increases in the index primarily driven by precious metals. The central bank’s revisions reflect a combination of factors, including GST rationalization and easing food prices, although weak external demand poses challenges.
Liquidity Measures and Market Impact
To support the economy further, the RBI announced measures to inject approximately Rs 1.45 lakh crore of liquidity into the bond market. This includes Rs 1 lakh crore in bond repurchases and a three-year dollar–rupee swap worth $5 billion. Malhotra described the current economic environment as a “rare Goldilocks period,” characterized by favorable inflation and strong growth. The liquidity measures are expected to enhance market conditions and encourage investments, particularly in the final quarter of the fiscal year. Bankers have noted that the governor’s actions come amid pressures on the rupee, which has recently depreciated to around 89.84–90 per dollar.
Global Context and Future Considerations
The RBI’s decision occurs in a global context where major central banks, including the US Federal Reserve and the European Central Bank, have maintained their interest rates. However, expectations for policy easing in 2026 are growing. Domestic economic data has been encouraging, with a reported 8.2% GDP growth in the second quarter, driven by strong services and investment sectors. Additionally, October’s CPI inflation was recorded at a historic low of 0.25%, attributed to GST cuts and stable food supplies. The recent rate cut is anticipated to bolster liquidity and support ongoing investments, although economists caution that the window for further cuts may narrow as inflation begins to rise from this year’s low levels.
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