A bit of rupee weakness is perhaps expected to aid exporters until tariff uncertainties blow over
Industrial production point to weakening momentum | Photo Credit: ANUSHREE FADNAVIS
In an earlier era, it would have been surprising if the Monetary Policy Committee (MPC) had cut the repo rate by 25 basis points at a time when GDP (Gross Domestic Product) growth prints overshot estimates. However, the Reserve Bank of India (RBI) has turned distinctly pro-growth since the present Governor took charge a year ago; MPC has all but shed its default hawkish garb.
This pivot is quite welcome; in an aspirational economy tasked with creating employment, monetary authorities cannot afford to be hawkish by force of habit. Since inflation is volatile and hard to call, it is important for the MPC to ease rates when benign inflation opens a window of opportunity. Today’s economic context also makes a case for a rate cut on three counts. One, though quarterly GDP growth for the last two quarters (at 7.8 per cent in Q1 and 8.2 per cent in Q2 FY26) exceeded expectations, they were helped by tax cuts, festive buying, front-loaded government spending and a low-base effect. The second half of the year could see US tariffs beginning to bite, while the base effect fades. High frequency indicators such as the October Index of Industrial Production (growth of 0.4 per cent) and November Purchasing Manager’s Index (nine-month low of 56.6) also point to weakening momentum. Therefore, the MPC probably saw reason to persist with its policy rate cuts to pre-empt a possible slowdown. RBI’s revised GDP growth projections of 7 per cent for Q3 and 6.5 per cent for Q4 FY26 in this review, also reinforce this view.
Two, from worrying about upside risks to inflation a couple of years ago, it now appears to be time for India to worry about disinflation risks. As the MPC has noted, food prices deflated in September and October and overall CPI inflation fell to an all-time low in October. Softening core inflation also (which would have printed at 2.6 per cent without the gold price spike) contributed to this. Ultra-low inflation, which suppresses wages, nominal growth and tax collections, is not healthy for the economy. A rate cut that revives inflationary impulses therefore looks like a desirable intervention. Three, the longer end of the yield curve has proved unresponsive to repo rate cuts in recent months, with the yield on 10-year gilts staying put in the 6.3-6.6 per cent range. This has kept borrowing costs for the government elevated despite falling policy rates. It could, in fact, be one of the reasons why RBI has also proposed to open the taps of liquidity wide, by announcing ₹1 lakh crore Open Market Operations (OMO) and a $5 billion rupee-dollar swap in this policy review.
The central bank has also sent out a firm message that it won’t let the weakening exchange rate dictate domestic monetary policy. A bit of rupee weakness is perhaps expected to aid exporters until tariff uncertainties blow over. India has been receiving dollar inflows into bonds amidst this currency weakness. Economic prospects and prudent fiscal policies can attract capital flows, irrespective of rate actions.
Published on December 5, 2025
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