India central bank cuts key rate, boosts liquidity to support ‘goldilocks’ economy

MUMBAI: The Reserve Bank of India (RBI) cut its key repo rate by 25 basis points on Friday and took steps to boost banking-sector liquidity by up to $16 billion to support a “goldilocks economy”.

The six-member monetary policy committee voted unanimously to lower the repo rate to 5.25%, in line with a consensus view, and maintained a “neutral” stance, suggesting room for further rate cuts. The central bank has now cut rates by a total of 125 basis points since February 2025. It held rates in August and October.

The Indian economy is facing a “rare goldilocks” period, RBI Governor Sanjay Malhotra said in a video address. Since October, India’s economy has experienced rapid disinflation leading to a breach of the central bank’s lower threshold of tolerance, said Malhotra, adding that growth has remained strong.

Given these macroeconomic conditions, “policy space” exists to support growth, he added.

The RBI also decided to conduct open market operations of 1 trillion rupees ($11.14 billion) to buy bonds this month, and another $5 billion in forex swaps to add liquidity to the banking system and speed up transmission of lower rates.

India’s benchmark 10-year bond yield dropped nearly 5 basis points to 6.4581% after the central bank’s moves.

The rupee fell 0.1% to 89.87, while the benchmark equity indexes were up 0.1% each.

 Stronger growth; lower inflation

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 US hit exports and sectors from textiles to chemicals.

External uncertainties could pose “downside risks” to growth, Malhotra said.

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.