RBI Pulls Trigger on 25 bps Rate Cut While India Eyes a Rare Goldilocks Phase

The Reserve Bank of India on Thursday delivered a 25-basis-point repo rate cut, its fourth since February, marking a decisive shift into an aggressive easing cycle, even as the rupee plunged to an unprecedented Rs 90 per dollar this week. Governor Sanjay Malhotra sought to reassure markets that the economy remains "strong, stable and resilient," anchored by rapid disinflation and a surge in growth.

"Given the recent inflation prints and the lack of transmission of lower interest rates in the banking sector, the RBI repo rate cut by 25bps is timely. Interestingly, the forward expectations of inflation have come much lower, opening the door for another rate cut if required before the end of the financial year," Vishal Goenka, Co-Founder of IndiaBonds.com, said.

According to Goenka, the idea is to make funding cheaper for governments and corporates, and the Rs. 1 lakh crore OMO purchases announcement should assist in boosting liquidity and flattening the yield curve. Following this, investors should look to lock in current high rates from corporates in the 2-3y segment and complement this by buying long end government bonds for potential gains,"

This was the fifth Monetary Policy Committee (MPC) meeting of the financial year 2026, and perhaps the most consequential. For the first time in years, India is experiencing a combination of falling inflation and accelerating growth, a phase Malhotra repeatedly described as a "rare Goldilocks period."

A Stunning Slide in Inflation

Malhotra opened his Monetary Policy Statement with unusual optimism. "We look back at the year so far with satisfaction. The economy witnessed robust growth and benign inflation," he said.

The most striking development is inflation crashing to 0.3% in October—a number few economists saw coming. Food staples stabilised, fuel prices softened, and core inflation eased, leading to what the governor called "rapid disinflation since the October policy."

"The RBI's decisive 25 bps repo rate cut to 5.25% and the GDP upgrade to 7.3% is nothing short of rocket fuel for India's startup economy. This policy shift hits the system at exactly the right inflection point, unlocking capital flows, lowering funding costs, and reigniting venture momentum across sectors. Cheaper credit will boost confidence from homebuyers to institutional investors, driving demand, accelerating transactions, and stabilising valuations across the ecosystem," Jeet Mukesh Chandan, Group Managing Director of BizDateUp said.

According to him, with EMIs dropping, consumer spending strengthening, MSME liquidity improving, and the ripple effect supercharging fintech, D2C, SaaS, and mobility startups—fueling scale, hiring, and innovation at unprecedented speed.

For FY26, the RBI slashed its CPI inflation forecast to 2%, sharply down from the earlier 2.6%. The downward revision stretches across quarters:

Q3: 0.6% (vs 1.8%)

Q4: 2.9% (vs 4.0%)

Q1 FY27: 3.9% (vs 4.5%)

Q2 FY27: 4.0%

The governor emphasised that inflation appears well within the target band, giving the central bank the space it needs to push ahead with policy easing.

"The RBI's decision to cut the repo rate by 25 bps is a powerful, proactive signal that strategically leverages India's macroeconomic strength – a robust 8.2% Q2 GDP expansion alongside record-low headline inflation. This is not a reactive measure to a slowdown, but a confident and forward-looking deployment of monetary space to deliver a structural stimulus, ensuring the nation's growth engine becomes more inclusive," Samantak Das, Chief Economist and Head – Research and REIS, India, JLL said.

Growth Surges Despite Global Headwinds

The story on the growth front is equally dramatic.

India recorded 8.2% GDP growth in Q2, significantly outperforming expectations. Strong festive spending, rationalised GST slabs, and buoyant manufacturing output helped fuel the surge.

"Inflation at a benign 2.2% and growth at 8% for the first half of the year presents a rare Goldilocks period," Malhotra said, framing the moment as a policy sweet spot seldom seen in emerging economies.

Reflecting this momentum, the RBI raised its GDP forecasts:

FY26: 7.3% (up from 6.8%)

Q3: 7.0% (up from 6.4%)

Q4: 6.5% (up from 6.2%)

Q1 FY27: 6.7%

Q2 FY27: 6.8%

The optimism is notable given deepening global slowdown worries, weak trade growth, and volatile commodity prices.

"By cutting the repo rate by 25 bps to 5.25% while maintaining a neutral stance, the MPC has clearly prioritised sustaining growth without losing sight of its 4% inflation target. The move should bolster investment and consumption into 2026, reinforcing our FY2026 real GDP projection of ~7.2%. From a credit rating lens, the move should ease borrowing costs and shore up debt-servicing capacity, which is mildly credit positive for high-leverage corporates and interest-sensitive sectors. Having said that, vigilant monitoring of external risks remains essential," Rajeev Sharan, Head – Criteria, Model Development & Research, Brickwork Ratings said.

Rate Cut: Relief for Borrowers, Worries for Savers

The MPC voted to cut the repo rate to 5.25%, aligning with expectations of economists and bond markets. With this decision, the RBI has now cut 125 bps in 2025—the most aggressive easing since the post-pandemic period.

For borrowers, especially homebuyers, this signals relief. Home loan EMIs are expected to inch down as banks begin passing the cut over the next few weeks.

But the news is less cheerful for depositors. Banks are likely to lower fixed deposit (FD) rates, particularly on short- and medium-term tenures. This could hurt senior citizens and conservative savers who rely on FDs for regular returns.

While Malhotra noted that rate transmission will be "orderly and calibrated," bankers say the direction of FD rates is clear: downward.

Balancing Act Amid Uncertainty

The RBI now faces a delicate balancing act—supporting growth through lower rates while managing currency weakness and preventing excessive capital outflow. The central bank seems to be betting that strong domestic fundamentals will offset global uncertainty.

For now, policymakers appear confident. "The Indian economy stands out in an uncertain world," Malhotra said. "Our focus remains on sustaining growth while ensuring inflation stays within target."

But with the rupee wobbling and global conditions tightening, the RBI may soon find that the Goldilocks moment it celebrates is also a narrow window—one that will test its ability to guide Asia's third-largest economy through the months ahead.