Policy Reflects Growth Concerns

Even as the Indian economy registered a six-quarter high growth of 8.2% in the July–September quarter of 2025-26, and the headline CPI inflation collapsed to 0.25% in October 2025, the Monetary Policy Committee of the Reserve Bank of India unanimously reduced the policy repo rate by 25 basis points to 5.25% in its fifth bi-monthly monetary policy review on December 5, 2025.

Generally speaking, when inflation is very low and growth is very high, central banks typically use a tight or contractionary monetary policy to cool a fast-growing economy and control overheating, which may generate strong demand-pull inflationary impulses. Yet the MPC’s unanimous decision to reduce policy rates, alongside the RBI’s move to inject large volumes of durable liquidity into the banking system through proposed open market purchase operations of ₹1 trillion and dollar swaps of $5 billion, clearly reflected the central bank’s growing concern about investment, consumption and overall growth momentum.

It also indicated that the MPC is relying more on high-frequency indicators rather than quarterly GDP statistics to form a view on the future growth trajectory, as GDP measurement has been affected by an outdated base year and the absence of a reliable producer price index. The National Account Statistics is currently examining the methodological issues related to GDP measurement.

While the MPC raised its GDP growth projection by 50 basis points to 7.3% for 2025-26, compared with its October estimate, by substantially increasing the projected quarterly growth rates for the October–December and January–March quarters of 2025-26, statements such as “there are some emerging signs of weakness in a few leading indicators”, “external uncertainties continue to pose downside risks to the trade outlook”, and “growth, while remaining resilient, is expected to soften somewhat” clearly reflected the Committee’s concerns about the growth outlook.

In fact, the current mix of expansionary fiscal policy—reduction in direct and indirect tax rates and significantly high public capex—and monetary policy—reduction in policy rates and infusion of durable liquidity—clearly shows the Indian policymakers’ efforts to support growth amid increased global uncertainty and sustained capital outflows. 

A decline of 5.5% in the rupee-dollar exchange rate in the current financial year until December 4 also warranted a growth-supportive policy framework.

Retaining the monetary policy stance at neutral was also an appropriate strategy in a period of significant uncertainty.

A decision to infuse durable liquidity into the system was a welcome move, as banking system liquidity had contracted sharply since mid-September 2025 because of a confluence of factors such as the Reserve Bank of India’s foreign exchange market interventions, tax-related outflows, a surge in credit demand and an increase in currency in circulation during the festival season.

These forces had, to a large extent, offset the liquidity-enhancing impact of the reduction in the cash reserve ratio announced in the June policy and implemented in a staggered manner from September 6 to November 29. While money-market interest rates eased between February and June 2025, they moved higher again in September and October 2025, reflecting the tight liquidity conditions. Long-term interest rates, including the 10-year government bond yield and corporate bond yields, remained elevated from late September onwards, slowing fund-raising activity in the corporate bond market during 2025-26 compared with 2024-25.

There was, however, one potentially adverse consequence of the day’s monetary policy action for the banking sector. According to the Reserve Bank of India’s latest weekly statistical statement, the credit–deposit ratio of banks reached 80.29% on November 14 because deposit mobilisation continued to lag behind credit disbursements. Moreover, the improvement in non-food credit offtake during the festival season has begun to weaken again. In absolute terms, loans disbursed by banks contracted by Rs 566.85 billion in the first fortnight of November 2025. From a credit perspective, banks will have to lower lending rates, while from a deposit perspective, they will need to offer higher interest rates to attract additional depositors. This combination is likely to compress net interest margins and weigh on profitability in the coming quarters.

To conclude, while the outward tone of the day’s monetary policy appeared optimistic, it quietly acknowledged the macro-financial risks that could emerge from growth uncertainty.