The RBI’s Monetary Policy Committee (MPC) opted for a repo rate cut at its Dec-25 meeting, following a divided consensus among market participants. The policy move lowered the repo rate by 25 bps to 5.25%, with corresponding adjustments in the SDF and MSF to 5.00% and 5.50%, respectively. The decision on rate reduction was unanimous. On the other hand, five members advocated for the continuation of a neutral policy stance, except for Professor Ram Singh, who (for the second consecutive time) advocated for a shift to an accommodative stance.

RBI’s macroeconomic projections

The forecast for FY26 GDP growth was revised upwards by 50 bps to 7.3%.

• Quarterly forecast for Q3 FY26 was lifted by 60 bps to 7.0%
• Projections for Q4 FY26 and Q1 FY27 were also raised by 30 bps each to 6.5% and 6.7% respectively.   
• GDP growth forecast for Q2 FY27 was introduced at 6.8%

On the inflation front, the FY26 CPI inflation estimate was pared lower once again, by 60 bps to 2.0%. This follows on the heels of a 50-bps reduction to CPI forecast (from 3.1% to 2.6%) announced in the Oct-25 policy review. With this move, the RBI has now trimmed its FY26 CPI projection for the fourth consecutive meeting. 

In line, quarterly inflation forecasts were marked lower: 

• Estimates for Q3 FY26 and Q4 FY26 were reduced sharply, with Q3 forecast cut by 120 bps to 0.6% and Q4 projection lowered by 110 bps to 2.9%.
• The forecast for Q1 FY27 was cut by 60 bs to 3.9% from 4.5% earlier
• CPI Forecast for Q2 FY27 was introduced at 4.0%

Our take

The upward revision in GDP growth projections takes into account the incremental data – both for Q2 FY26 GDP as well as high frequency indicators for Oct/Nov-25.

• The recently released Q2 FY26 GDP growth came in at a 6-quarter high of 8.2%, exceeding the RBI’s estimate of 7.0% by a sizeable 120 bps. This has put H1 FY26 growth at a lofty 8.0%.
• The boost from GST rationalisation at the start of the festive period, is likely to see growth buoyancy continue well into Q3 FY26. 
• The impact of US tariffs on select Indian exports is becoming evident but is appearing to be lower than what was initially feared. Further, as per media updates, discussions between India and US trade representatives are at an advanced stage, with a likelihood of an official statement of the trade deal.
• Having said, the Governor did highlight downside risks to growth for external/trade related uncertainties. 

On the other hand, the downward adjustment in CPI inflation forecast takes on board the downward surprise to recent inflation prints, especially over the months of Sep-25 and Oct-25 - with the latter slipping to a record low of 0.25%YoY. The moderation has been driven by benign food prices defying seasonal trends, amidst above normal monsoon and higher kharif production. The healthy start to rabi sowing along with adequate levels of water in reservoirs augur well for food inflation outlook, alongside a range-bound movement in global commodity prices (except for precious metals).

Inferences and Outlook

Since the Oct-25 monetary policy, the outlook on both growth and inflation has undergone a substantial shift. While growth has surprised on the upside, inflation has on the downside – putting the domestic economy in a classic ‘Goldilocks’ situation. This comfort perhaps pushed RBI’s rate decision of the 25-bps cut. 

Having said, the choice of rate cut was a close one, owing to two factors –

One, the recent depreciation in the Rupee, which has pushed the currency beyond 90 to the dollar. As a thumb rule, 5% depreciation in the Rupee adds 35 bps to CPI inflation over the course of 1 year. Keeping in mind that current inflation level remains exceptionally benign (and the outlook remains comfortable too), the decision to refrain from a rate cut could have been influenced by a desire to use interest rates as a defence against further currency weakness.

On the other hand, GDP growth while expected to clock above 7.0% in FY26, is likely to see a decent moderation in H2 FY26 (from 8.0% in H1 to 6.8% in H2) in a backloaded manner. The waning of GST support, seasonal consumption push in Q3 and some moderation in the pace of Government capex (as tax revenue growth lags BE) is likely to weigh on growth, which one can argue needed support. 

Looking ahead, we think that RBI is now at the end of its easing phase, with a prolonged pause here on. The bottoming out of inflation here is unlikely to allow any incremental rate reductions in 2026. 

From the market’s perspective, the RBI announcement on liquidity was critical. It indicated an additional 1 tn of OMO purchases as well as USD 5 bn of FX buy-sell swap. This will likely add Rs 1.5 tn to liquidity in a cumulative manner before the end of CY25. This is likely to offer comfort to the bond market. We retain our 10Y g-sec yield call of 6.30% (with mild upside risk) for Mar-26.