The Reserve Bank of India’s December 2025 monetary policy review marks a significant pivot towards growth support, underscoring a delicate balancing act in a complex macroeconomic landscape. With a unanimous 25 basis points cut, the repo rate now stands at 5.25%, accompanied by a retention of the neutral policy stance. This decision, driven by exceptionally benign inflation—CPI projections for FY26 have been revised down to 2.0%—reflects the RBI’s commitment to fostering economic momentum even amid robust GDP growth of 8.2% in Q2FY26 and a volatile currency.
Inflation: The Enabler
Headline inflation has remained comfortably below the RBI’s target range, with core inflation also easing. This disinflationary trend has provided the necessary policy space to prioritize growth. The central bank’s forward-looking assessment suggests inflation will remain around the 4% target in the first half of FY27, reducing near-term pressure on rates. However, the sharp depreciation of the INR and strong domestic growth impose caution, making further rate cuts contingent on incoming data.
Growth Resilience and Risks
India’s growth narrative remains robust, with FY26 GDP projections revised upward to 7.3%. Resilient domestic demand and strong services exports have offset global trade uncertainties. Yet, risks loom—particularly potential drags from subdued merchandise exports and prolonged high US tariffs. The RBI’s growth upgrades signal confidence, but the moderation projected for FY27 (around 6.7-6.8%) hints at a cautious optimism.
Liquidity Reinforcement
A standout feature of this policy is the proactive liquidity measures: a ₹1 lakh crore OMO purchase and a USD 5 billion forex swap. These steps, announced despite existing liquidity surplus, demonstrate the RBI’s intent to ensure smooth monetary transmission and manage forex volatility. Governor Malhotra’s emphasis on durable liquidity reaffirms that supporting growth and stabilizing currency moves are simultaneous priorities.
Impact on Debt Markets
The dovish policy is a clear positive for debt markets. G-sec yields across tenors have already softened, with the benchmark 10-year yield dipping marginally. Elevated real yields (given low inflation) enhance the attractiveness of fixed income. Corporate bond spreads in the 1–5 year segment offer accrual opportunities, while OMO purchases in the 5–10 year segment could further flatten the yield curve. Investors may consider duration strategies, but with the rate cut cycle nearing its end, capital gains may be limited—focus should shift to quality accrual.
Equity Market Outlook
For equities, the policy is broadly supportive. Lower interest rates reduce borrowing costs, aiding corporate profitability and investment. Sectors like banking, real estate, and capex-driven industries stand to benefit. However, equity markets will also track growth sustainability and external risks. The RBI’s growth upgrade provides fundamental support, but volatility may persist due to currency fluctuations and global trade tensions. A balanced approach—blending cyclical and defensive sectors—is prudent.
Personal View on the Indian Economy
In my view, the Indian economy is at a crossroads of strength and sensitivity. The RBI’s nuanced approach—cutting rates while holding stance neutral—reflects a mature policy framework aimed at extending the growth cycle without igniting inflationary pressures. The immediate focus on liquidity and forex stability is commendable. However, structural challenges—such as export competitiveness, fiscal discipline, and global trade fragmentation—require continued attention.
For investors, the current environment favors a balanced asset allocation. Debt markets offer safety and reasonable real returns, while equities remain the growth engine, albeit with higher volatility. The RBI’s actions have laid a foundation for stability, but data-dependency means markets must stay agile.
In summary, the December policy reinforces growth with caution. As inflation remains subdued and growth holds firm, India’s macroeconomic story remains compelling—but navigated with vigilance
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