The Reserve Bank of India (RBI) delivered a policy surprise on Friday by cutting the repo rate by 25 basis points to 5.25 percent, while maintaining a neutral stance. Despite expectations of status quo, the central bank leveraged softening inflation to extend monetary support. Alongside the rate cut, the RBI also moved proactively on the liquidity front, announcing ₹1 trillion of OMO purchases and a $5 billion buy sell swap, aimed at improving transmission and supporting financial conditions.
A key highlight of the policy was the central bank’s dovish inflation outlook. With headline CPI inflation dropping to 0.25 percent in October driven by subdued food prices, favourable base effects, and recent GST cuts the RBI slashed its inflation forecast for FY26 by 60 bps to 2.0 percent. Projections for Q1 FY27 were also revised down to 3.9 percent. Yes Bank’s internal estimates point to even softer inflation at 1.8 percent for FY26 and 3.0 percent for Q1 FY27.
While the RBI refrained from signaling a rate cut in February, it emphasized that both headline and core inflation are expected to remain anchored around 4 percent in H1 FY27, reinforcing its confidence in price stability.
On the growth front, the central bank expressed optimism about India’s economic momentum. High frequency indicators including rural passenger vehicle sales, two wheeler demand, and strong air traffic show robust activity in Q3, supported by GST reductions and accommodative policy measures.
Overall, the RBI’s stance remains supportive yet cautious, balancing softer inflation with sustained growth. While markets may have hoped for clearer forward guidance, the central bank has chosen flexibility, keeping the door open for future action depending on data trends.
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