Low Inflation, Strong Growth Raise Hopes of Further RBI Stimulus in 2026

The fact that there has been strong growth, as well as relief on the inflation side, has given hope that the Reserve Bank of India (RBI) may focus on stimuli as well for the upcoming year, that is, 2026. At the same time, the focus will be on the value of the rupee, since there has been a fall.

With such low retail inflation, the RBI chose to reduce its key policy rates by a total of 1.25 percentage points four times out of the six monetary policy announcements in 2025. The newly appointed Governor, Sanjay Malhotra, began the trend of cutting rates to promote economic growth at his first ever Monetary Policy Committee (MPC) meeting in Feb this year. He further strengthened this by reducing the Repo Rate by 0.50% in June due to low inflation.

Malhotra, a bureaucrat-turned-central bank governor, on the completion of one year in office, described the current economic situation as a rare balanced period for India. Despite adverse factors such as US tariffs and geopolitical changes, growth remained above 8% and inflation remained below 1%. The governor also clarified that economic growth may moderate further, and retail inflation, which has been declining so far, will rise to reach the RBI's target of 4%.

The RBI completes its 90th anniversary in 2025, and one of its biggest challenges this year was the rupee's slide below the 90-mark against the dollar. The central bank maintains that its market interventions are not to preserve any level, but to reduce volatility.

The RBI sold more than $38 billion in foreign exchange reserves in the first nine months of this year amid a weakening domestic currency. Experts believe that managing the rupee will continue to be challenging for the central bank. The rupee has depreciated 4.79% so far this year. On December 31, 2024, it closed at 85.64 against the dollar.

Amid concerns about low GDP growth at current prices, Malhotra said the RBI's actions are based on real GDP, which is derived after subtracting inflation. Actual inflation figures were significantly lower than the RBI's estimates, raising some questions about the central bank's forecasting ability. Deputy Governor Poonam Gupta stated that there is no systematic bias in the estimates.

The RBI's action dealt a blow to banks due to clear expectations of a repo rate cut and a decline in borrowing costs. Banks were affected by a decline in net interest margins (NIMs) and a decline in core income. However, measures such as ensuring adequate liquidity in the economy and regulatory easing, mitigated the impact to some extent.

The RBI implemented several regulatory easing measures throughout the year. The October monetary policy announcement was the culmination of this, comprising 22 regulatory measures. Some of these measures were unusual for an institution like the RBI. These included allowing banks to finance global acquisitions by Indian companies. Malhotra's emphasis on customer sensitivity and speedy resolution of complaints has been reflected in many of his speeches and remarks.