MPC Finds Comfort in Benign Inflation, Reinforces Growth Momentum

The minutes of the Monetary Policy Committee’s December meeting reveal a pivot towards supporting demand. While earlier meetings reflected differences on the timing and signalling of further easing, the latest deliberations show broad convergence on two assessments, inflation is expected to remain decisively benign, and the economy faces sufficient headwinds to justify policy support aimed at sustaining growth and stimulating demand.

There was little concern among mpc members that an additional reduction in the policy rate could trigger overheating. Headline inflation has fallen sharply, reaching just 0.3% in October, with full-year inflation for 2025–26 projected at around 2%. Several members observed that even this low reading overstates underlying price pressures, as precious metals have inflated both headline and core measures. Excluding gold and silver, inflation momentum appears even weaker, pointing to subdued demand rather than excess heat in the economy.

“Thus, demand pressures, as evident from low core inflation (excluding precious metals), are minimal and projected to remain low in the next three quarters,” said RBI Governor Sanjay Malhotra. “Considering the benign inflation outlook – headline as well as core - real interest rates need to be lower.”

RBI Deputy Governor Poonam Gupta said the combination of low inflation across nominal indicators and slowing momentum in select activity metrics points to slack in the system. “One may ask whether the current rate cut, resulting in a cumulative rate cut of 125 bps, could lead to overheating in the economy. However, not just headline and core inflation, but most other nominal indicators of the economy are prevailing at levels that indicate that the economy at this point is not showing any signs of overheating. Instead, one could interpret the data as indicating that there is slack in the economy,” she said.

Growth concerns featured prominently in the discussion. While headline GDP growth remains robust, members pointed to emerging signs of deceleration beneath the surface. Nagesh Kumar highlighted the impact of geopolitical and trade-related uncertainties, particularly US tariff actions, on labour-intensive export sectors such as textiles, garments, leather, gems and jewellery, and processed foods.

Export softness too was a recurring theme in the minutes. Indranil Bhattacharyya noted that while high-frequency indicators suggest the economy is holding up in the near term, several leading indicators point to moderation ahead, with growth projected to ease to around 6.8% in the second quarter of 2026-27.

Saugata Bhattacharya observed that lending rate transmission to both fresh and outstanding loans has been satisfactory and broad-based, particularly benefiting small and medium enterprises.  

The committee downplayed concerns that a rate cut could destabilise the external sector or stoke imported inflation. While acknowledging exchange rate pressures and portfolio outflows, members pointed to India’s strong macro fundamentals, subdued global commodity prices, and China’s excess capacity acting as a global disinflationary force. These factors, in their assessment, significantly limit inflation pass-through from currency movements.