RBI’s 25 bps rate cut marks rare policy shift as inflation hits historic lows: SBI Ecowrap

In a rare policy move, the Reserve Bank of India’s Monetary Policy Committee (MPC) on December 5 cut the repo rate by 25 basis points to 5.25%, despite the economy recording strong GDP growth above 8.2% and consumer inflation plunging to 0.25%. 

According to the latest Ecowrap report by SBI Research, the MPC’s unanimous vote signals its intent to stay ahead of emerging global uncertainties while continuing to support domestic growth. The stance remains neutral, with the Standing Deposit Facility (SDF) rate revised to 5.00% and the Marginal Standing Facility (MSF) rate and Bank Rate to 5.50%. The CRR remains at 3.0%.

Inflation projection slashed dramatically 

Citing lower food inflation, robust kharif output, healthy rabi sowing, and comfortable reservoir levels, the RBI sharply reduced its FY26 inflation forecast to 2.0%, down from 2.6% projected in October. 

• Q3 FY26 inflation is expected at 0.6% 
• Q4 FY26 at 2.9% 
• Q1 FY27 and Q2 FY27 at 3.9% and 4.0%, respectively 

SBI Research expects inflation to average 1.8% in FY26 and 3.4% in FY27, suggesting further downside risks ahead. 

Growth outlook upgraded 

The RBI has revised India’s FY26 real GDP growth projection to 7.3%, with Q3 and Q4 expected at 7.0% and 6.5%. SBI Research, however, is more optimistic. It forecasts GDP above 7% in both Q3 and Q4, pegging FY26 growth at 7.6%. 

Liquidity management 

System liquidity has remained in surplus this fiscal, though with sharp fluctuations through September and October. To ensure smooth transmission of rate cuts, the RBI announced two significant interventions: 

1. OMO Purchases: ₹1 lakh crore durable liquidity injection conducted in two tranches of ₹50,000 crore each on Dec 11 and Dec 18 
2. USD/INR Buy-Sell Swap: $5 billion swap of three-year tenor expected to inject ₹45,000 crore. Aimed at managing rupee volatility as the currency recently breached the ₹90 per USD mark before recovering 

The report notes that elevated NDF forward premiums signal rising hedging costs amid global volatility. The swap is expected to ease MIFOR rates, reduce hedging costs, and support overseas borrowing. 

Exceptional nature of the rate cut 

SBI Research highlights the unusual nature of cutting rates amid high growth and low inflation, noting that globally such instances are rare. Historic parallels from the UK, Indonesia, and China show rate cuts occurred only when inflation levels were much higher than India’s current 0.25%. 

Banking system stable & well-capitalised 

India’s banking sector remains sound, the report says. 

• Credit growth: 11.3% YoY (as of Oct 31, 2025) 
• Deposit growth: 9.7% 
• GNPA ratio improved to 2.05% 
• Capital adequacy (CRAR): 17.24% 

Transmission of the cumulative 100 bps rate cut since February 2025 has been broad-based. Lending rates for fresh loans have fallen by 69 bps, while fresh term deposit rates have dropped 105 bps. 

Markets must stay 'Non-Exuberant' 

The report cautions that while RBI has provided the policy backing for sustained growth, financial markets must show maturity and avoid overreaction, especially as tariff uncertainties and global risk-off sentiments may weigh on external demand. 

SBI Research concludes that with inflation expected to fall further in FY27, this may not be “the end of Santa Claus sentiments,” but the central bank has “done its best” to ensure policy remains firmly growth-supportive.