India is in a rare “Goldilocks” phase of surging growth and low inflation, the Reserve Bank of India (RBI) said on Friday as it rolled out a long-awaited interest rate cut.
With prices rising just 2.2 per cent and GDP expanding a blistering 8 per cent in the first half of the year, the Monetary Policy Committee (MPC) lowered the repo rate by a quarter of a percentage point to 5.25 per cent.
The RBI also suggested that more cuts could follow.
The repo rate is essentially the rate at which banks borrow from the central bank. When it comes down, household, personal, and corporate loans tend to get cheaper across the board.
Governor Sanjay Malhotra said the RBI wants the lower rates to “transmit to the real economy first,” which means banks need to actually pass on the cheaper rates so households and businesses can feel the benefit.
Malhotra called the current economic situation a “rare Goldilocks moment for India,” marked by strong growth and exceptionally low inflation.
The RBI didn’t stop at cutting rates. It also pumped extra funds into the system to make sure the benefits reach borrowers. It bought Rs 1 lakh crore of government bonds, creating a big pool of cash for banks to lend out.
Economists noted that India’s growth could still be at risk because of stalled US trade talks, steep American tariffs of 50 per cent on Indian goods, and a tricky global political landscape.
“The central bank has clearly indicated that stimulating economic growth is its primary goal,” said Ajay Kejriwal, analyst at Choice International. The RBI understands that “the external environment is very challenging,” he added.
Malhotra hinted that further cuts could be on the cards if inflation stays low. “If inflation continues the way it is, we expect the policy repo rates to be low, and not high,” he said.
Garima Kapoor, an economist at Elara Capital, added, “We believe that there would be scope for another 25 basis points cut this cycle, as inflation is expected to remain benign and… there are no signs of overheating in the economy.”
The central bank also cut its inflation forecasts and sharply upgraded its growth projections. India is benefiting from strong domestic demand, robust investment, and muted inflation. In October, inflation was reported at 0.25 per cent, widely seen as an all-time low.
The RBI now expects the economy to grow 7.3 per cent in the current financial year, up from an earlier forecast of 6.8 per cent.
Private economists are just as upbeat. Sakshi Gupta of HDFC Bank said, “We expect GDP growth at 7.3 per cent in this financial year and 6.5 per cent in the following year.”
For borrowers, the news is welcome. Home loan EMIs should drop as banks adjust rates. Car loans and personal loans will also get cheaper, and businesses will find it less expensive to borrow for investment.
“The growth orientation of monetary policy will facilitate higher investment by the private sector,” said D. K. Srivastava, economist at EY India.
Savers may earn slightly less, but as long as prices stay under control, real returns should remain reasonable since inflation is low.
The rupee erased early gains on Friday after the rate cut was announced. It slipped to 90.07 per dollar, still above its record low of 90.42 hit on Thursday.
The RBI seems willing to accept a weaker rupee as India manages multiple headwinds, including a wider trade gap and slower foreign investment, while the government focuses on growth.
“We just let the rupee find its correct position, correct level,” Malhotra said.
Until last month, the RBI had been actively supporting the rupee by buying rupees and selling dollars. The currency has fallen 5.5 per cent so far this year, making it the worst-performing in Asia. Economists suggest the rupee could be trading at around 92-93 to the dollar next year.