India's Rare Goldilocks Period: High Growth Meets Low Inflation

The remarks came as the Reserve Bank announced its latest monetary policy decision, cutting the repo rate by 25 basis points to 5.25 per cent, after the three-day review meeting that concluded today.

Opening his statement, Malhotra said the economy had navigated an "eventful and challenging" 2025 with resilience.

"The economy witnessed robust growth and benign inflation...We approach the new year with hope, vigour and determination to further support the economy and accelerate progress," he said.

Highlighting the unprecedented disinflation, Governor Malhotra noted that average headline inflation for Q2 fell to 1.7 per cent, slipping below the lower tolerance band of the RBI's flexible inflation-targeting framework for the first time.

Inflation fell even further to 0.3 per cent in October 2025, driven by a sharp decline in food prices.

"The faster than anticipated decline in inflation was led by correction in food prices," he said.

Nearly 80 per cent of the CPI basket is now recording inflation below 4 per cent, pointing to a broad-based softening across goods and services.

The Governor added that inflation is likely to remain softer than earlier projected, supported by higher kharif output, healthy rabi sowing, and favourable commodity trends.

The RBI revised its CPI inflation forecast for 2025-26 to just 2.0 per cent, down from previous estimates.

Quarterly projections show inflation at 0.6 per cent in Q3 and 2.9 per cent in Q4, before rising to 3.9 per cent in Q1 2026-27 and 4.0 per cent in Q2, still within the central bank's 2-6 per cent target range.

Governor Malhotra also noted that "underlying inflation pressures are even lower as the impact of increase in price of precious metals is about 50 bps. Growth, while remaining resilient, is expected to soften somewhat."

Even as inflation cooled dramatically, economic growth surged.

India's real GDP expanded 8.2 per cent in Q2 2025-26, fuelled by robust consumption and aided by GST rate rationalization exercise of September 2025.

"Growth at 8.0 per cent in H1:2025-26 and inflation at a benign 2.2 per cent present a rare goldilocks period," the Governor said.

Taking all factors into account, the RBI raised its GDP growth projection at 7.3 per cent for the full year, up by half a percentage point.

Given the favourable growth-inflation balance, the MPC unanimously voted for a 25-bps rate cut, maintaining a neutral stance.

"The growth-inflation balance, especially the benign inflation outlook, continues to provide the policy space to support the growth momentum," Malhotra said.

To aid liquidity, the RBI announced Rs 1 lakh crore of OMO purchases and a 3-year USD 5 billion buy-sell swap this month, measures that will "ensure adequate durable liquidity in the system and further facilitate monetary transmission."

"I would like to reiterate that we are committed to provide sufficient durable liquidity to the banking system. We continuously assess the durable liquidity requirements of the banking system due to changes in currency in circulation, forex operations, and reserve maintenance. Going forward too, we shall continue to do so. After reviewing the liquidity situation and the outlook, we have decided to conduct open market operation (OMO) purchases of government securities amounting to ₹1,00,000 crore and 3-year USD/INR Buy Sell swaps of USD 5 billion this month. The details will be notified separately later today. These measures will ensure adequate durable liquidity in the system and further facilitate monetary transmission," the RBI governor said.

Foreign exchange reserves stand at USD 686.2 billion, providing over 11 months of import cover.

"Overall, India's external sector remains resilient.24 We are confident of meeting our external financing requirements comfortably."

Concluding his address, Malhotra praised the Indian economy's strength amid global challenges.

"Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience and is poised to register high growth. The headroom provided by the inflation outlook has allowed us to remain growth supportive. We will continue to meet the productive requirements of the economy in a proactive manner while ensuring macroeconomic stability," Governor Malhotra concluded.

- ANI