RBI ends 2025 with sharp growth pivot after most aggressive rate cuts since 2019

The Reserve Bank of India closed 2025 with a decisive shift towards supporting growth, delivering four interest rate cuts and reducing the benchmark repurchase rate by a cumulative 125 basis points. The rate-setting Monetary Policy Committee, led by Governor Sanjay Malhotra, brought borrowing costs down from 6.50% in February to 5.25% by December, despite pauses in August and October, marking the central bank’s most aggressive easing cycle in six years.

Since assuming office last year, Malhotra has steered monetary policy in a more growth-oriented direction than his predecessor, Shaktikanta Das. At the final MPC meeting of the year, he said the Indian economy was experiencing a rare Goldilocks phase characterised by strong growth and low inflation. Retail inflation fell to a record low of 0.25% in October and has remained below the RBI’s four% target since February 2025.

Economic growth also surprised on the upside. India, the world’s fifth-largest economy, expanded by 8.2% in the July–September quarter, outperforming expectations and improving on the 7.8% growth recorded in the April–June period. This resilience came even as the outlook was clouded by steep tariffs imposed by US President Donald Trump. While many economists doubt that this momentum will be sustained if uncertainty over a trade deal with the US persists, the strong data provided space for policy support.

External pressures, however, weighed heavily on the currency. The rupee slid to record lows during the year, breaching the psychologically important INR 91 per dollar level before recovering some ground, and emerged as Asia’s worst-performing currency amid heightened trade tensions with the US.

It was against this backdrop of robust domestic data, external risks and currency stress that Malhotra and his colleagues charted policy through the year. February marked Malhotra’s first policy meeting as governor, and the committee voted unanimously to cut the repo rate by 25 basis points to 6.25%, the first reduction in nearly five years. Policymakers flagged concerns that an overly restrictive stance could hurt growth, while inflation was seen moving closer to the 4% target.

In April, the RBI followed up with a second consecutive cut, lowering the repo rate by another 25 basis points to 6%. By then, expectations were building that US tariffs could begin to weigh on India’s economy. Malhotra said the global year had begun on an anxious note, even as India continued to make steady progress and remained vigilant.

June saw the most decisive move of the cycle. The MPC delivered a larger-than-expected 50-basis-point cut, bringing the repo rate to 5.50% and shifting policy out of restrictive territory into neutral territory. Heightened uncertainty from Trump’s trade measures and fears of a global slowdown prompted central banks worldwide to act. Malhotra said front-loading rate cuts were necessary to provide certainty amid uncertainty.

The RBI paused in August, holding rates steady at 5.50% to assess the evolving impact of US tariffs, including a doubling of levies on Indian exports from 25% to 50%. With earlier rate cuts still working through the system, Malhotra said policy needed to remain watchful, while maintaining that India’s economic prospects remained bright despite global trade challenges.

Another pause followed in October, as the MPC kept the repo rate unchanged at 5.50%. Malhotra said the improved outlook for headline and core inflation created room to support growth further, but stressed that fast-changing global developments and policy uncertainty required decisions to be taken meeting by meeting.

In December, the RBI delivered its final cut of the year, trimming the repo rate by 25 basis points. Malhotra said lower real interest rates were warranted, given the benign inflation outlook, and that maintaining a neutral stance would provide the flexibility needed to remain data-dependent as macroeconomic conditions evolve.

Source: Economic Times