RBI Governor voted for rate cut on back of benign inflation, to support growth: MPC minutes show

India’s monetary policy committee decided to lower the repo rate by 25 basis points (bps) in December on the back of benign inflation and emerging signs of weakness, even as the growth surprised with a stronger-than-expected GDP print in the second quarter.

“Considering the benign inflation outlook – headline as well as core – real interest rates need to be lower. Therefore, I vote for a 25-bps rate cut,” said Reserve Bank of India (RBI) governor Sanjay Malhotra, who also heads the rate-setting panel, according to the minutes of the meeting released on Friday.

The cut, he said, will also stimulate demand and support growth. “Moreover, I am in favour of retaining the neutral stance which gives the requisite flexibility to remain data-dependent and act according to the evolving macroeconomic conditions and outlook,” said Malhotra.

According to Malhotra, demand pressures, as evident from low core inflation (excluding precious metals), are minimal and projected to remain low in the next three quarters.

While announcing the rate cut on 5 December, the RBI governor had said that while growth remained resilient, it is expected to soften somewhat. High-frequency indicators, he said, suggest that domestic economic activity is holding up in Q3, although there are some emerging signs of weakness in a few leading indicators.

The RBI cut the repo rate by 25 bps to 5.25%, citing a “rare goldilocks period” where growth remains robust and inflation benign, surprising a section of the market that expected a pause.

According to deputy governor Poonam Gupta, the most crucial recent development from the perspective of monetary policy has been the faster-than-anticipated moderation in CPI headline inflation.

India's retail inflation, as measured by the Consumer Price Index, stood at 0.7% in November, up from 0.25% in October. Under the flexible inflation targeting framework, the Monetary Policy Committee (MPC) targets retail inflation at 4% with a tolerance band of +/-2%.

“Therefore, even if the MPC members traditionally consider a whole host of factors in their decisions, but when the prevailing inflation and its forecast is as low as it is currently–it alone ought to get a larger weight in the monetary policy deliberations,” said Gupta.

On whether the cumulative rate cut of 125 bps (between February and December) could lead to overheating in the economy, Gupta said that 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,” said Gupta.

A recent report by Axis Bank flagged the same point. Given the economic slack, the economy can sustain above-trend growth for a few years before inflationary pressures build up, Neelkanth Mishra, chief economist at Axis Bank and head of global research at Axis Capital, had noted in the report on 10 December. Trend growth is defined as a sustainable rate of growth taken over a period of time.

Internal MPC member and executive director Indranil Bhattacharyya said that flexible inflation targeting derives credibility from predictable policy responses based on the current state of the economy, while retaining the flexibility to use discretion during exceptional circumstances. He said that in the Indian context, the credibility of monetary policy is reinforced by a firm commitment to the 4% inflation target.

“In the current context, when muted inflation outlook, both in terms of the trajectory of headline and core (excluding precious metals), suggests absence of demand pressures, the MPC ought to support growth, particularly when it is projected to decelerate going ahead,” said Bhattacharyya.

This, he said, is also consistent with the MPC’s October communication of acting on policy space provided by lower than projected inflation prints.

External MPC member Saugata Bhattacharya also pointed to the October resolution, which said that “current macroeconomic conditions and the outlook opened up policy space for further supporting growth”, based primarily on low inflation.

“Subsequent data on inflation—even lower than forecast—has further expanded this space, irrespective of the strong Q2 FY26 GDP growth print, whose interpretations have been widely debated,” he said.

The Indian economy posted a surprising six-quarter high growth rate of 8.2% in the quarter ended September, significantly higher than the RBI’s 7% projection and the 7.2% median estimate in a Mint poll of 15 economists.

“Inflation has continued to undershoot forecasts. While the low prints have largely emanated from a small set of components, the broader basket of “underlying” inflation, too, is likely to undershoot the inflation target for many months,” said Saugata Bhattacharya.

Economists at Barclays said in a note on Friday that most members referred to the RBI MPC's primary mandate of "inflation targeting" as they called for a rate cut amid lower-than-expected inflation outcomes.

“MPC minutes indicate that the committee opportunistically lapped up the space that a record-low inflation outcome and benign outlook offered, especially as growth is expected to moderate in H2,” the note said.