Nifty slips on Trump tariff tantrum; RBI goes for a dovish cut
·
On Monday, December 8, 2025, Nifty stumbled from
RBI’s dovish cut high after Trump sounded hawkish on India’s rice export
·
RBI may again cut rates by 25 bps in Feb’26,
followed by a further 50 bps for a repo
rate of 4.50% by Feb’27
·
Banks are under pressure as their NIM may be affected
due to yield curve flattening, as the RBI may cut another 75 bps in 2026 for a
repo rate of 4.50%
·
After another ‘insurance cut’ of 25 bps on
December 10, 2025, the Fed may not cut further until September’26
India’s benchmark stock index, Nifty, and also Bank
Nifty surged on a dovish cut by the RBI on Friday, December 5, 2025. Although
RBI cut the rate by 25 bps as was highly expected, RBI Governor sounded more
dovish than expected and virtually indicated another 25 bps rate cut in the next
MPC meeting in February’26. As expected, RBI resumed OMO (liquidity injection)
along with VRRR (liquidity absorption) to maintain adequate system liquidity. Overall,
the RBI maintained a neutral stance, i.e., a real interest rate of around 1.00-1.50% from the average core CPI of 4.2% over the last 3-6 months. The RBI Governor sounded
quite dovish and indicated another 25 bps rate cut potential in Feb’26.
Full
Text-Monetary Policy Statement, 2025-26 Resolution of the Monetary Policy
Committee December 3 to 5, 2025
“Monetary
Policy Decisions
The Monetary Policy Committee (MPC) held its 58th
meeting from December 3 to 5, 2025, under the chairmanship of Shri Sanjay
Malhotra, Governor, Reserve Bank of India. The MPC members Dr. Nagesh Kumar,
Shri Saugata Bhattacharya, Prof. Ram Singh, Dr. Poonam Gupta, and Shri Indranil
Bhattacharyya attended the meeting.
After a detailed assessment of the evolving
macroeconomic and financial developments and the outlook, the MPC voted
unanimously to reduce the policy repo rate under the liquidity adjustment
facility (LAF) to 5.25 per cent. Consequently, the standing deposit facility
(SDF) rate shall stand adjusted to 5.00 per cent, and the marginal standing
facility (MSF) rate and the Bank Rate to 5.50 per cent. The MPC also decided to
continue with the neutral stance.
Growth
and Inflation Outlook
The global economy is holding up better than
expected, though the earlier frontloading of trade is showing signs of normalizing.
Uncertainty has eased somewhat following the end of the US government shutdown
and progress on trade agreements, yet it remains elevated. Global inflation
dynamics remain uneven, with inflation trending above target in most major
advanced economies. The US dollar strengthened primarily on safe-haven demand
while treasury yields remained range-bound. Equity markets remain volatile,
driven by shifting views on the monetary policy outlook and concerns
surrounding stretched valuations in tech stocks.
In
India, real gross
domestic product (GDP) registered a six-quarter high growth of 8.2 per cent in
Q2:2025-26, underpinned by resilient domestic demand amidst global trade and
policy uncertainties. On the supply side, real gross value added (GVA) expanded
by 8.1 per cent, aided by buoyant industrial and services sectors. Economic
activity during the first half of the financial year benefited from income tax
and goods and services tax (GST) rationalization, softer crude oil prices,
front-loading of government capital expenditure, and facilitative monetary and
financial conditions supported by benign inflation.
High-frequency
indicators suggest that domestic economic activity is holding up in Q3, although there are some emerging signs of weakness
in a few leading indicators. GST rationalization and festival-related spending
supported domestic demand during October-November. Rural demand continues to be
robust while urban demand is recovering steadily. Investment activity remains
healthy with private investment gaining steam on the back of expansion in
non-food bank credit and high capacity utilization. Merchandise exports
declined sharply in October amid subdued external demand, accompanied by softer
services exports. On the supply side, agricultural growth is supported by
healthy kharif crop production, higher reservoir levels, and better rabi crop
sowing. Manufacturing activity continues to improve, and the services sector is
maintaining a steady pace.
Looking
ahead, domestic factors
such as healthy agricultural prospects, continued impact of GST
rationalization, benign inflation, healthy balance sheets of corporates and
financial institutions, and congenial monetary and financial conditions should
continue to support economic activity. Continuing reform initiatives would
further facilitate growth.
On
the external front, services exports are likely to remain strong, while
merchandise exports face some headwinds. External uncertainties continue to pose downside
risks to the outlook, while the speedy conclusion of ongoing trade and
investment negotiations presents upside potential.
Taking
all these factors into consideration, real GDP growth for 2025-26 is projected
at 7.3 per cent, with Q3 at
7.0 per cent, and Q4 at 6.5 per cent. Real GDP growth for Q1:2026-27 is
projected at 6.7 per cent and Q2 at 6.8 per cent. The risks are evenly
balanced.
Headline
CPI inflation declined to an all-time low in October 2025. The faster-than-anticipated decline in inflation
was led by a correction in food prices, contrary to the usual trend witnessed
during September and October. Core
inflation (CPI headline excluding food and fuel) remained largely contained in
September-October, despite continued price pressures exerted by precious
metals. Excluding gold, core inflation moderated to 2.6 per cent in October. Overall,
the decline in inflation has become more generalized.
Turning to the inflation outlook, food supply
prospects remain bright on the back of higher kharif production, healthy Rabi
sowing, adequate reservoir levels, and conducive soil moisture. Barring some
metals, international commodity prices are likely to moderate going forward.
Overall, inflation is likely to be softer than what was projected in October,
mainly on account of the fall in food prices.
Considering
all these factors, CPI inflation for 2025-26 is now projected at 2.0 per cent with Q3 at 0.6 per cent, and Q4 at 2.9 per cent.
CPI inflation for Q1:2026-27 and Q2 are projected at 3.9 per cent and 4.0 per
cent, respectively. In fact, the underlying inflation pressures are even lower
as the impact of the increase in the price of precious metals is about 50 basis
points (bps). The risks are evenly balanced.
Rationale
for Monetary Policy Decisions
The MPC noted that headline inflation has eased
significantly and is likely to be softer than the earlier projections,
primarily on account of the exceptionally benign food prices. Reflecting these
favourable conditions, the projections for average headline inflation are in
2025-26, and Q1:2026-27 have been further revised downwards. Core inflation,
which had been rising steadily since Q1:2024-25, eased at the margin in
Q2:2025-26 and is expected to remain anchored in the period ahead. Both headline and core inflation are
expected to be around the 4 per cent target during the first half of 2026-27. The
underlying inflation pressures are even lower as the impact of the increase in the
price of precious metals is about 50 bps. Growth, while remaining
resilient, is expected to soften somewhat.
Thus,
the growth-inflation balance, especially the benign inflation outlook on
both headline and core, continues to provide the policy space to support the
growth momentum. Accordingly, the MPC unanimously voted to reduce the
policy repo rate by 25 bps to 5.25 per cent. The MPC also decided to continue with the neutral stance. However,
Prof. Ram Singh was of the view that the stance should be changed from neutral
to accommodative.
The minutes of the MPC’s meeting will be published
on December 19, 2025.
The next meeting of the MPC is scheduled from
February 4 to 6, 2026.”
Governor’s
Statement: December 05, 2025
"Good morning and Namaskar. We are in the
last month of an eventful and challenging 2025. We look back at the year so far
with satisfaction. The economy witnessed robust growth and benign inflation;
the banking system further consolidated, and the regulatory framework was
refined to strengthen the financial system, enhance ease of doing business, and
improve consumer protection. At the same time, we approach the New Year with
hope, vigour, and determination to further support the economy and accelerate
progress.
Since
the October policy, the Indian economy has witnessed rapid disinflation, with
inflation coming down to an unprecedentedly low level. For the first time since the adoption of flexible
inflation targeting (FIT), average headline inflation for a quarter at 1.7 per
cent in Q2:2025-26, breached the lower tolerance threshold (2 per cent) of the
inflation target (4 per cent). It dipped further to a mere 0.3 per cent in
October 2025. On the other hand, real GDP growth accelerated to 8.2 per cent in
Q2, buoyed by strong spending during the festive season, which was further
facilitated by the rationalization of the goods and services tax (GST) rates. Inflation at a benign 2.2 per cent and
growth at 8.0 per cent in H1:2025-26 present a rare goldilocks period.
Contrary
to earlier expectations, global growth has been relatively strong. Evolving geopolitical and trade environments,
however, continue to weigh on the outlook. Inflation paths remain divergent,
with headline inflation remaining above target in most advanced economies,
while pressures in most emerging markets are contained, providing room for
accommodative monetary policy. Conflicting pulls and pressures from AI-fueled
optimism and concerns over high valuations are playing out in global equity
markets, while divergence in the monetary policy trajectory of central banks is
adding to the uncertainty on capital flows and yield spreads.
Major
Decisions of the Monetary Policy Committee (MPC) and the RBI
The Monetary Policy Committee (MPC) met on the
3rd, 4th, and 5th of December to deliberate and decide on the policy repo rate.
After a detailed assessment of the
evolving macroeconomic conditions and the outlook, the MPC voted unanimously to
reduce the policy repo rate by 25 basis points (bps) to 5.25 per cent with
immediate effect. Consequently, the standing deposit facility (SDF) rate
under the liquidity adjustment facility (LAF) shall stand adjusted to 5.00 per
cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.50
per cent. The MPC also decided to continue with the neutral stance.
Moreover, in view of the evolving liquidity
conditions and the outlook, the Reserve Bank has decided to conduct OMO purchases of government securities of ₹1,00,000
crore and a 3-year USD/INR Buy Sell swap of USD 5 billion this month to inject durable liquidity into the
system.
I
shall now briefly set out the rationale for the decisions of the MPC.
The MPC noted that headline inflation has eased
significantly and is likely to be softer than the earlier projections,
primarily on account of the exceptionally benign food prices. Reflecting these
favourable conditions, the projections for average headline inflation in
2025-26 and Q1:2026-27 have been further revised downwards. Core inflation,
which had been rising steadily since Q1:2024-25, eased at the margin in
Q2:2025-26 and is expected to remain anchored in the period ahead. Both headline and core inflation are
expected to be at or below the 4 per cent target during the first half of
2026-27. The underlying inflation pressures are even lower as the impact of
the increase in the price of precious metals is about 50 basis points (bps).
Growth, while remaining resilient, is expected to soften somewhat.
Thus, the growth-inflation balance, especially the
benign inflation outlook on both headline and core, continues to provide the
policy space to support the growth momentum. Accordingly, the MPC unanimously
voted to reduce the policy repo rate by 25 bps to 5.25 per cent. The MPC also
decided to continue with the neutral stance.
Assessment
of Growth and Inflation
Growth
Real gross domestic product (GDP) registered a
six-quarter high growth of 8.2 per cent in Q2:2025-26, underpinned by resilient
domestic demand amidst global trade and policy uncertainties. On the supply
side, real gross value added (GVA) expanded by 8.1 per cent, aided by buoyant
industrial and services sectors. Economic activity during the first half of the
financial year benefited from income tax and goods and services tax (GST) rationalization,
softer crude oil prices, front-loading of government capital expenditure, and
facilitative monetary and financial conditions supported by benign inflation.
High-frequency
indicators suggest that domestic economic activity is holding up in Q3,
although there are some emerging signs of weakness in a few leading indicators. GST rationalization and festival-related
spending supported domestic demand during October-November. Rural demand
continues to be robust while urban demand is recovering steadily. Investment
activity remains healthy with private investment gaining steam on the back of
expansion in non-food bank credit and high capacity utilization. Merchandise
exports declined sharply in October amid subdued external demand, accompanied
by softer services exports. On the supply side, agricultural growth is
supported by healthy kharif crop production, higher reservoir levels, and
better rabi crop sowing. Manufacturing activity continues to improve, while the
services sector is maintaining a steady pace.
Looking ahead, domestic factors such as healthy
agricultural prospects, continued impact of GST rationalization, benign
inflation, healthy balance sheets of corporates and financial institutions, and
congenial monetary and financial conditions should continue to support economic
activity. Continuing reform initiatives would further facilitate growth.
On the external front, services exports are likely
to remain strong, while merchandise exports face some headwinds. External
uncertainties continue to pose downside risks to the outlook, while the speedy
conclusion of various ongoing trade and investment negotiations presents upside
potential.
Taking
all these factors into consideration, real GDP growth for 2025-26 is projected
at 7.3 per cent, with Q3 at
7.0 per cent, and Q4 at 6.5 per cent. Real GDP growth for Q1:2026-27 is
projected at 6.7 per cent and Q2 at 6.8 per cent. The risks are evenly
balanced.
Inflation
Headline CPI inflation declined to an all-time low
in October 2025.14 The faster-than-anticipated decline in inflation was led by a
correction in food prices, contrary to the usual trend witnessed during the
months of September-October. Core inflation (CPI headline excluding food and
fuel) remained largely contained in September-October, despite continued price
pressures exerted by precious metals. Excluding
gold, core inflation moderated to 2.6 per cent in October. Overall, the
decline in inflation has become more generalized.
Turning to the inflation outlook, food supply
prospects have improved on the back of higher kharif production, healthy Rabi
sowing, adequate reservoir levels, and conducive soil moisture. Barring some
metals, international commodity prices are likely to moderate going forward. Overall,
inflation is likely to be softer than what was projected in October, mainly on
account of the fall in food prices.
Considering
all these factors, CPI inflation for 2025-26 is now projected at 2.0 per cent with Q3 at 0.6 per cent, and Q4 at 2.9 per cent.
CPI inflation for Q1:2026-27 and Q2 are projected at 3.9 per cent and 4.0 per
cent, respectively. The underlying inflation pressures are even lower as the
impact of the increase in the price of precious metals is about 50 bps. The
risks are evenly balanced.
External
Sector
India’s current account deficit moderated from 2.2
per cent of GDP in Q2:2024-25 to 1.3 per cent in Q2:2025-26 on account of
robust services exports and strong remittances. In October 2025, merchandise
exports contracted year-on-year, whereas merchandise imports continued to
increase for the second consecutive month, resulting in a widening of the trade
deficit. Healthy services exports coupled with strong remittance receipts are
expected to keep CAD modest during 2025-26.
On
the external financing side, gross
foreign direct investment (FDI) to India increased at a robust pace during the
first half of the year. Net FDI also increased significantly due to a decline
in repatriation despite a rise in outward FDI.22 Foreign portfolio investment
(FPI) to India recorded net outflows of US$0.7 billion in 2025-26 so far
(April-December 03), due to outflows in the equity segment. Flows under
external commercial borrowings and non-resident deposit accounts moderated as
compared to last year. As of November 28, 2025, India’s foreign exchange
reserves stood at US$686.2 billion, providing a robust import cover of more
than 11 months. Overall, India’s external
sector remains resilient. We are confident of meeting our external financing
requirements comfortably.
Liquidity and Financial Market Conditions
System liquidity, as measured by the net position
under the LAF, stood at an average surplus of ₹1.5 lakh crore for the period since the MPC last
met in October 2025.
Money market rates have remained largely aligned with
the policy repo rate amidst comfortable liquidity conditions.26 G-sec yields
have remained range-bound since the last policy. In response to the cumulative 100 bps cut in the policy repo rate, the
weighted average lending rate (WALR) of Scheduled Commercial Banks has declined
by 69 bps for fresh rupee loans during February-October 2025 (the interest rate
effect is 78 bps). The moderation in the weighted average lending rate
(WALR) of outstanding rupee loans has been to the extent of 63 bps.
Transmission has been broad-based across sectors. On the deposit side, the weighted average domestic term deposit rate
(WADTDR) on fresh deposits has declined by 105 bps, while that on outstanding
deposits has softened by 32 bps over the same period.
I
would like to reiterate that we are committed to providing 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.
I would also like to take this opportunity to
clarify that injection (absorption) of liquidity through purchase (sale) of
government securities under OMOs, and those through operations under the LAF
(VRR or VRRR) of short-term duration serve very different purposes. While the objective of purchase (sale)
under OMO is to provide (absorb) durable liquidity, the purpose of repo
operations is to manage transient liquidity to align the operating target – the
Weighted Average Call Rate (WACR) – to the policy repo rate. So, we may
inject durable liquidity through the purchase of government securities under
OMO on the one hand, while simultaneously withdrawing transient liquidity
through a VRRR operation on the other hand.
I would further like to reiterate that the primary
instrument of monetary policy is the policy repo rate. It is expected that
changes in the short-term interest rates will be transmitted to various
long-term rates. At the same time, the
primary purpose of open market operations is to provide sufficient liquidity
and not to directly influence G-sec yields.
Financial
Stability
The system-level financial parameters related to
capital adequacy, liquidity, asset quality, and profitability of Scheduled
Commercial Banks (SCBs) continue to remain robust. Similarly, the system-level
parameters of NBFCs are sound, with adequate capital position and improved
gross non-performing asset (GNPA) ratios.
The total flow of resources to the commercial
sector has strengthened, bolstered by greater non-bank intermediation. In the
current financial year so far, the total flow of resources was ₹20.1 lakh crore vis-Ã -vis
₹16.5
lakh crore in the corresponding period of the previous year. Outstanding credit
from bank and non-bank sources was increased by 13 per cent (y-o-y).
Bank credit growth, too, has seen an uptick in
recent months.31 Sector-wise32 data reveals that the growth was supported by
sustained lending to retail and service sector segments. Industrial credit
growth firmed up, aided by buoyant credit flow to micro, small, and medium
enterprises (MSMEs). Large industries also recorded an improvement in credit
growth. Additional
Measures
Before
I conclude, I have one additional measure to announce.
We have been focusing on improving customer service.
We have taken a large number of measures in this regard. Re-KYC, financial
inclusion, and “Aapki Poonji, Aapka Adhikar” campaigns are some of the
initiatives taken in association with other stakeholders. Earlier in the year,
we reviewed our Citizens Charter too. We made applications for all our services
online. We are publishing the summary of our monthly disposal and pendency of
various applications on the first of every month. I am happy to note that more
than 99.8 per cent of the applications are disposed of within stipulated
timelines.
However, in the recent past, as a result of, inter
alia, receipt of a large number of grievances, pendency with the RBI Ombudsman
has increased. I exhort all regulated entities to keep customers central in
their policies and operations, improve customer service, and reduce grievances.
Further, we propose to hold a two-month campaign from 1st January next year
with an aim to resolve all grievances pending for more than a month with the
RBI Ombudsman. I elicit the support of all regulated entities in this endeavour.
Concluding
Remarks
Let me now conclude. Despite an unfavorable 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 proactively while ensuring
macroeconomic stability.
Thank you;
Namaskar
and Jai Hind.”
Highlights
of comments by the RBI Governor/MPC in Q&A: December 5, 2025
Following the Monetary Policy Committee (MPC)
announcement on December 5, 2025, RBI Governor Sanjay Malhotra addressed the
media in a post-policy press conference. He emphasized the unanimous 25 basis
points repo rate cut to 5.25% as a calibrated response to benign inflation and
robust growth, describing the current phase as a "rare Goldilocks
moment" with inflation at multi-year lows (2.2% average in H1:2025-26) and
growth at 8%.
Economic
Outlook and Growth Drivers
·
Resilient Domestic Demand: Highlighted strong festive-season spending, GST
rationalization, and robust rural demand as key boosters. Urban consumption is
improving steadily, with private investment gaining momentum due to rising
non-food bank credit and capacity utilization around 75%.
·
Goldilocks Scenario: Noted a rare alignment of 8% growth and
controlled inflation in the first half of FY26, providing headroom for policy
support. Forward-looking factors like healthy agricultural prospects, softer
crude prices, and government capex front-loading will sustain activity.
·
We are in a rare Goldilocks phase," with resilient domestic demand driven by festive
spending, GST rationalization, and rural recovery. He raised FY26 GDP
projections to 7.3% (from 6.8%), citing healthy agriculture, corporate balance
sheets, and government capex as sustainers.
·
Global Uncertainties: Stressed India's domestic-demand-driven economy
remains insulated from external shocks, with ongoing reforms to facilitate
higher growth.
·
- On global risks: "India's economy remains largely
domestic-demand driven," insulating it from external shocks like US
tariffs, which have "minimal overall impact" due to limited sectoral
exposure and relief measures from RBI and government.
Inflation
Dynamics
·
Benign Pressures: Significant moderation in inflation (October CPI
at 0.3%, Q2 average at 1.7%) allows space for easing. Underlying pressures are
even lower, with precious metals adding ~50 bps to core CPI OF ~4.0%; Core
inflation expected to stay anchored at or below 4% through H1:2026-27.
·
"Inflation remains very benign" once excluding volatile food and precious metals
(adding ~50 bps to core); underlying/core inflation is anchored at ~3.5% and
expected below 4% through H1FY27. Revised FY26 CPI to 2.0% (down from 2.6%),
with Q3 at 0.6%.
·
"If inflation continues the way it is, we
expect the policy repo rates to be low, and not high."
·
Projections Integrated: Revised FY26 CPI to 2.0% (down from 2.6%),
reflecting even-balanced risks. Emphasized comfort with forward inflation at
4.0% in Q2:FY27.
Monetary
Policy and Transmission
·
Neutral Stance Retained: "We are at neutral today," allowing
flexibility. The cumulative 100 bps cut in FY26 (from 6.25% to 5.25%) supports
growth without overheating.
·
"We are at neutral today," retaining
flexibility after cumulative 125 bps cuts in 2025. Emphasized: "The key focus now is on monetary policy
transmission" – allowing the latest cut to flow through to real economy
credit costs before further decisions.
·
Liquidity Injection: Announced ₹1 lakh crore (T) OMO purchases (in two tranches on
December 11 and 18) for durable liquidity, not to influence bond yields. Added
a $5 billion 3-year USD/INR buy-sell swap (December 16) to ease tightness and
aid transmission—deposits have seen a 105 bps decline in fresh term rates.
·
Transmission Progress: Policy measures will reduce credit costs, boost
demand, and meet the economy's productive needs proactively.
·
Cautioned against speculation: "We want transmission to take effect in the
real economy first. After that, we will review how inflation behaves and take
decisions policy by policy."
On
Liquidity Measures
·
Announced
₹1
trillion (T) OMO purchases (in tranches) and $5 billion 3-year USD/INR buy-sell
swap for durable liquidity, not yield targeting. "I am not targeting a
specific level like 1%; the aim is to reassure banks... that sufficient
liquidity will be available, especially as interest rates trend lower."
·
Distinguished:
These are for "durable" injection, separate from transient LAF
operations.
External
Sector and Rupee
·
No Target Levels: "We just let the rupee find its correct
level" and "We don't target any level of rupee, we allow the market
to determine price." RBI's effort is to curb abnormal volatility while
ensuring orderly movements. Factored current levels into inflation outlook;
reserves at $686 billion support stability.
·
On
depreciation effects: A 5% rupee fall adds ~35 bps to inflation but boosts
exports/GDP by ~25 bps. "We are in a very comfortable position; volatility
can happen."The external sector is strong with CAD at 1.3% of GDP.
·
Comfortable Position: Factored current rupee levels into inflation
outlook; external sector stable with CAD at 1.3% of GDP in Q2:FY26, robust
FDI/services exports, and reserves at $686.2 billion.
·
US Tariffs Impact: Minimal overall effect due to domestic focus;
limited sectoral hits, with RBI and government providing relief.
Financial
Stability and Other Initiatives
·
Banking Health: Gross NPAs at 2.05%, strong balance sheets in
banks and corporates.
·
Customer Service: Launch of a January 2026 campaign to resolve
increasing grievances pending for over a month with the RBI Ombudsman.
·
Broader Support: Measures align with fiscal policy for
macroeconomic stability amid global trade/policy risks.
Other
Highlights
·
On
Commodity trading: Welcomed SEBI's proposal on banks in non-agri commodity
derivatives.
·
On
fraud prevention: RBI and banks have implemented steps to curb financial crimes
and aid victim recovery.
·
Broader
vision: Actions align with reforms for higher growth; economy "poised to
register high growth" if momentum sustains.
Governor
Malhotra concluded that the economy is "poised to register high growth," with
policy focused on sustaining momentum while vigilantly monitoring inflation. These
comments underscore a proactive yet vigilant RBI, prioritizing growth support
while monitoring transmission and risks.
India's
central bank cuts key rate, boosts liquidity to support "goldilocks"
economy
·
RBI
cuts repo rate; 125 basis points in rate cuts in 2025
·
Bond
purchases, forex swaps announced to boost liquidity
·
Inflation
below the threshold leaves policy space open
·
External
financing requirements will be met comfortably
·
RBI
maintains monetary policy stance as neutral
·
FY26
real GDP growth projection raised to 7.3% vs 6.8%
·
Reserve
Bank says external uncertainties pose a downside to the growth outlook
·
2025
ends with 125 basis points in the rate cuts, the steepest since 2019. Back
then, rapidly falling growth had driven the easing; this year, it's the rapidly
falling inflation.
Conclusions
Theoretically,
India’s total inflation is now around 1.3% on average (3MRA). Thus, as per the RBI’s
single mandate of maintaining price stability (CPI) around 4.0%, the RBI cuts the
rate to bring back inflation to the target. Practically, India’s core CPI is
now running around 4.3% on average (3MRA), around the target, while the unemployment
rate is 7.5% (unofficial CMIE data) and real GDP growth is 7.4%
(Q2FY26-TTM-Flash).
Although
RBI has officially no dual mandate, as per the global central bank (Fed)
standard, it has to bring down the headline unemployment rate below at least 5%
for maximum employment, while ensuring price stability. India’s true core CPI
(w/o Gold, Silver/precious metals) is now around 3.5% (as per RBI).
India’s
real GDP growth for Q2FY26-TTM was around 7.4% and projected growth for FY26
may be around 6.8%in best best-case scenario; RBI’s projection is now around
7.3%. India’s real GDP growth should be around 8.0% at least on average for the
next 25 years for quality inclusive maximum employment (at least 95%-94%). RBI
is now increasingly focusing on super core CPI (w/o precious metals) rather
than total CPI, being distorted by food inflation volatilities.
Thus,
to keep price stability or core CPI at least around 4.0% (vs 3.5% now),
unemployment rate below 5% (vs 6.5% at present-average of CMIE 7.5% and
MOSPI/Govt data 5.3%) and real GDP growth above 8.0%, RBI must maintain
accommodative stance going forward, especially amid hostile Trump trade/tariff
war policies.
RBI is now cutting rates as headline CPI dips well
below 4% targets, while India’s economic growth suffered some setbacks in FY25.
India’s real GDP growth is now slowing towards a long-term trend of 6.0% from
the 8.8% average in the last three years (post-COVID). Indian economy needs to
grow at least 10.0% in real terms so that the headline unemployment rate falls
below 5% on a durable basis from the present 7.5%. The Government should ensure
proper core CPI and employment data and give the RBI and the Fed the dual
mandate of maximum employment (say 95% of the labor force) and minimum price
stability (say 3.0% core CPI target).
India’s Real GDP Growth
RBI, especially under the Modi admin, never finds
any faults in India’s domestic economy. But the GDP-savvy Modi admin and also the
RBI should now look into the employment situation in the country, as headline
unemployment remains around 7.5%, while youth unemployment, underemployment,
and disguised unemployment are much higher. Almost 42% of India’s educated
youths are unemployed (below 25 years of age), indicating a significant
mismatch in skills and jobs available. Although employment is primarily a
fiscal policy issue, as a central bank, the RBI should also maintain stable
lower prices for maximum employment (like the US Fed).
Lower price stability and higher real income will
ensure higher discretionary consumer spending, which will result in higher
private capex or business investments and quality jobs. India’s GDP growth is
too dependent on higher government spending & consumption, while private
consumption and capex growth remain weak. RBI and the government should focus
on core GDP data (Private consumption + Private Investment/CAPEX) without
cheerleading about headline GDP growth. India’s government spending is
increasing at an alarming pace in public debt & liabilities, which is
devaluing the local currency (INR) over the years; USDINR is appreciating
almost 5% on average, in line with headline inflation, increasing pace of M2,
external debt, and CAD.
Although India’s core CPI was substantially below
4.0% in 2024 and total CPI was above 5.0% due to double-digit food inflation,
RBI, under Das, didn’t cut rates as officially, RBI has the single mandate of
price stability –inflation –total CPI target, not core CPI. But unlike
developed economies such as the US, EU, or China, India’s inflation, especially
on food, is often driven by supply shock due to various reasons, including
adverse weather and regulations, rather than too much demand, which the RBI
needs to control with monetary policy tightening and higher borrowing costs.
Looking ahead, the Indian economy may face slower
growth due to subdued domestic private consumption and a potential Trump trade
war tantrum. India’s 3-month moving average (3MRA) of CPI is now around 1.3%, while
core CPI is 4.3%. The recent uptick in core CPI is mainly due to higher Gold,
while the sudden slump in total CPI is due to a fall in food/vegetable
inflation from very high prices (base effect). RBI thinks that India’s headline
and also core inflation should be around the 4.0% target on a durable basis in
FY27.
However, economic growth may be affected
negatively due to Trump's trade & tariff war. RBI thinks that India may be
less affected by to Trump trade war as, unlike China, India is not an
export-heavy economy. But as a proactive
measure and correcting past policy mistakes, RBI cut 50 bps in June’25, and
cumulatively cut 100 bps in CY25 so far, in line with the Fed’s 100 bps cut in
H2CY24. RBI, under Governor Das, may have made a policy mistake by not cutting
rates in H2CY24 despite India’s core CPI hovering around 3.3% and the Fed and
ECB cutting rates proactively in anticipation of the Trump trade war.
India has a large informal economy coupled with
widespread corruption involving public money and government fiscal stimulus.
This, along with the steady devaluation of the local currency (INR) and the
Goldinization of the economy, RBI’s monetary policy has been largely
ineffective in controlling India’s inflation for decades after decades. This is
a legacy issue, not a particular RBI governor.
Due to excessive Government spending, fiscal
stimulus leakage cut money. Corruption involving various infrastructure
projects, a large section of the Indian consumer does not need to borrow money
to support consumption, and thus RBI policy is largely ineffective. Also, most
of the Indian banks & financial institutions are now too worried about the
return of capital rather than return on capital, and thus lend to only
qualified, eligible borrowers irrespective of RBI policy. RBI also does not
encourage excessive lending proactively and always keeps an owlish stance,
warning banks. Thus, India’s core inflation largely hovers around 4.0% to 5.0%,
even when the RBI cuts the rate.
Due to its huge population of almost 1.5 billion
with a relatively younger demography, the demand for food & fuel items is
always high and increasing against a constrained or limited supply of the
economy, especially for food items, which are a basic necessity. The government
should have ensured a higher supply through proper policy reform, deregulation,
and lower taxation. As a central bank, RBI has the tool to control the demand
side of the economy to manage inflation, not the supply side, which is solely
the responsibility of the government (fiscal side action).
As per Taylor’s rule, as a base case scenario, RBI
has to cut rates to 4.00% by FY27 from the present 5.25% to bring down the unemployment
rate below 5%, maintaining core CPI around 4.00% and real GDP growth around
6.5%.
Considering India’s potential inflation &
growth trajectory along with the elevated unemployment rate, RBI may bring down
the repo rate further to 5.0% by FY26 (Feb’26 policy) and 4.0% terminal rate by
FY27 (Feb’27 policy) against the Fed’s 3.0% and PBOC/China 3.0%. Going forward,
RBI may maintain the present policy rate differential of 1.00% with the Fed and
may follow Fed rate cuts with a focus on domestic core inflation and real GDP
growth trajectory, along with the employment situation in the country (at least
unofficially). RBI may cut 25 bps in Feb’26, followed by two more cuts in
June’26 and Oct’25.
Potential
impact of RBI rate cuts:
RBI rate cuts, i.e., lower borrowing costs, would
be better for the overall Indian economy and stocks, especially interest-sensitive
real estate, automobile, consumer durables, retail, infra, and even
export-oriented sectors like pharma and IT service (higher USDINR). But at the
same time, India’s imported inflation may rise as USDINR may scale the 92-95
range by Dec’26/Feb’27, if RBI indeed cuts repo rates to 4.0%.
Although lower RBI rates will be positive for
bonds and also positive for banks, especially public sector banks, due to their
high exposure in GSEC bonds, overall yield flattening is negative for the NIM/lending
model and negative for banks to some extent. As the government is the promoter
of public sector Banks (PSBs) and contributes significant recapitalization
capital for NPA waiver off, it does not want lower RBI repo rates like 4.00-3.00%.
Also, the government gets a huge amount of dividends from both RBI and PSBs,
which may be affected due to lower rates and lower bonds. In brief, the Government
wants both public and private sector banks to be healthy and resilient and thus
may not cut rates below 4.50% under normal economic & financial situations
(base case).
Nifty
stumbled on lingering uncertainty about the US-IN trade deal and muted earnings
growth despite a dovish cut by the RBI.
Although at present, Nifty may again scale ATH
26500-27500 on never-ending hopes of an imminent US-India trade deal optimism,
looking ahead, lower tariffs on US goods may also hurt the bottom line of
Indian corporates. For the time being, all focus would be on earnings for
Q2FY26, which is poised to come around 800 for Nifty. And at around 26000, TTM
PE would be around 32.5, in a clear bubble zone.
Trump's
Hawkish Comments on India's Tariffs on Rice
On December 5, 2025, during a White House
roundtable discussion with representatives from the farming and agriculture
sector, as well as key cabinet members including Treasury Secretary Scott
Bessent and Agriculture Secretary Brooke Rollins, President Donald Trump
addressed trade imbalances with India, specifically focusing on rice imports.
The event also included the announcement of $12 billion in federal aid (bailout)
for U.S. farmers affected by ongoing trade disputes.
·
On Rice "Dumping": Trump stated that India should not be
"dumping" rice into the U.S. market, implying unfair trade practices
where subsidized or low-priced Indian rice undercuts American producers. He
emphasized that this contributes to broader agricultural trade deficits.
·
Tariff Solution: Trump asserted that tariffs would "solve the
problem easily" and vowed to "take care" of the issue, signaling
potential new or escalated duties on Indian rice imports to protect U.S.
farmers. This aligns with his long-standing "America First" trade
policy, which has previously targeted agricultural goods from countries like
India.
These comments were part of a larger conversation
on global trade reciprocity, where Trump highlighted how high Indian tariffs on
U.S. products (e.g., up to 100% on certain agricultural items) justify
reciprocal measures. No specific tariff percentage was announced for rice
during the roundtable, but it echoed his administration's prior actions, such
as the 2019 tariffs on Indian goods.
Trade
Background: India is a
major global rice exporter, with basmati rice being a key item in U.S. imports
(valued at over $500 million annually pre-tariff escalations). U.S. rice
farmers have long complained about competition from Indian imports, exacerbated
by India's export bans and subsidies. After Thailand, India is the 2nd
largest rice exporter to the US, not because of price, but quality and specific
texture, which can’t be matched with the US production. And Indians, Pakis,
Bangladeshis, and other South-East Asian immigrants in the US are the primary
customers.
Broader
India-U.S. Relations:
The remarks come amid strained ties, including Trump's recent criticisms of
India's 50-100% tariffs on U.S. motorcycles, almonds, and apples. However,
electronics and pharmaceuticals were reportedly excluded from potential new
tariffs to avoid disrupting supply chains. U.S. farm groups praised the
comments for supporting domestic agriculture, while Indian officials have not
yet responded publicly. Overall, it may be a part of Trump’s strategy to keep
India under pressure just ahead.
The
White House script:
A businesswoman/Farmer told Trump that “India is
dumping rice” and “there’s a WTO case against India.”
TRUMP: Scott, India. Tell me about India. Why is
India allowed to do that? They have two tariffs. Do they have an exemption for
rice?
BESSENT: No, sir. We're still working on their
trade deal
TRUMP: They shouldn't be dumping. Give me the
countries if you could. Mark it down, Scott.
Farmer: "India, Thailand, China..."
TRUMP: "Mark it down, would you, Scott?" BESSENT: "Yes, sir!"
TRUMP: "SO EASY to set up."
FARMER: "I can get you others, too."
TRUMP: "Get me a full list...we will get it
solved VERY QUICKLY!"
Trump: "Why is India allowed to do that
("dumping rice into the US")? They have to pay tariffs. Do they have
an exemption on rice?"
Bessent: "No, sir. We're still working on
their trade deal..."
Trump: “They should not be dumping. They cannot do
that..."
TRUMP "MARKS DOWN" INDIA!
Following
President Trump's December 5, 2025, comments at the White House roundtable—where he criticized India's rice
"dumping" and high tariffs on US goods like motorcycles, almonds, and
apples, while advocating reciprocal tariffs to protect American farmers—new
developments emerged from a Senate Appropriations Committee hearing the next
day. US Trade Representative (USTR) Jamieson Greer provided an optimistic
update on ongoing negotiations, signaling potential progress amid the tensions.
Key
Takeaways from Greer's Testimony:
·
India's "Best Ever" Offer: In response to Senator Jerry Moran's question on
boosting US agricultural exports, Greer praised India's proposals as "the
best that the US has ever received." This marks a shift from the
"tough nut to crack" characterization of past talks, highlighting
India's "forward-leaning" approach.
·
Negotiation Status: A US delegation, led by Deputy Trade
Representative Rick Switzer, is currently in New Delhi for two days of
intensive discussions (as of December 10). India was among the first countries
to engage in trade deal talks with the Trump administration post-inauguration,
but is also emerging as the last major country for the much-awaited trade deal.
Greer emphasized India's potential as a "viable alternative market"
for US goods, especially agriculture.
·
Sector Focus: The talks center on overcoming India's resistance
to US imports of crops, meat, and dairy products. While broader agricultural
imbalances (including rice) remain a flashpoint from Trump's remarks, the
hearing did not delve into specifics like rice tariffs, motorcycles, or
almonds. Efforts aim to address tariff disparities, with Trump having escalated
threats to 25% (post-August 1 deadline lapse) and up to 50% linked to India's
Russian oil purchases.
Greer's comments underscore the Trump
administration's "America First" reciprocity push, aligning with the
$12 billion farmer aid announced on December 5. No firm timeline for a deal was
given, but the active delegation suggests momentum toward resolution,
potentially averting a full trade escalation. This hearing reflects a pragmatic
US stance: leveraging Trump's tariff warnings as negotiation leverage while
acknowledging India's concessions. Indian officials have yet to comment
publicly on the "best offer" claim.
US
Trade Delegation in India: Ongoing Talks amid Tariff Tensions
As of December 11, 2025—the second and final day
of scheduled negotiations—a high-level US trade delegation, led by Deputy US
Trade Representative Rick Switzer, is actively engaged in discussions in New
Delhi. This visit builds directly on the momentum from US Trade Representative
(USTR) Jamieson Greer's Senate testimony on December 10, where he described
India's concessions as "the best offer the US has ever received" in
trade talks. The delegation's arrival soon after Russian President Putin’s visit
and also aligns with President Trump's December 5 push for reciprocal tariffs
on Indian rice and other goods, aiming to resolve imbalances in agriculture and
beyond. These are framed as "not formal rounds" but substantive
working-level talks focusing on the first tranche of a Bilateral Trade
Agreement (BTA).
Indian side: Led by Commerce Secretary Rajesh
Aggarwal (chief negotiator) and Joint Secretary Darpan Jain (now handling key
aspects). The US side: Includes Switzer and Assistant USTR for South and
Central Asia Brendan Lynch, emphasizing reciprocity under Trump's "America
First" policy.
v Agriculture
and Rice Tariffs:
Direct response to Trump's rice "dumping" critique. Discussions
target US access to Indian markets for crops, meat, dairy, and row crops, while
addressing India's subsidized rice exports (valued at ~$2B annually to the US).
India has shown "forward-leaning" openness, per Greer, potentially
easing barriers despite domestic farmer sensitivities.
v Broader
Tariffs: Tackling Trump's
25% base + 25% penalty tariffs on Indian goods, linked to India's Russian oil
purchases. Exporters report an 8.58% drop in October shipments to the US
($6.3B), underscoring urgency.
v BTA
Framework: Aiming to double
bilateral trade from $191B to $500B by 2030. Optimism for a 2025 framework
deal, though full BTA may take longer; six prior rounds completed.
v US
Perspective: The embassy
reaffirmed commitment to the "strategic partnership," viewing India
as a China alternative for US agri-exports. Greer's praise signals leverage
from Trump's tariff threats.
v Indian
Perspective: Commerce
Minister Piyush Goyal noted "progressing" talks, balancing farmer
protections with export growth. India stresses strategic autonomy, per External
Affairs Minister S. Jaishankar. But India will not negotiate at gunpoint.
Bottom
line:
After GST rate recalibrations, India is planning to
recalibrate its decades-high & complex tariff rates too to accommodate the US,
EU, and imports from other countries as an overall strategy/reform rather than
the US/EU only BTA/FTA. India may also provide limited access to US/EU
agri/farm products, mostly in the premium category, with some modifications.
India/Modi is trying to use China and Russia as leverage against Trump’s bellicose
tariffs & trade policies. There may be a preliminary BTA between the US and
India by December 25, along with the withdrawal of 25% additional tariffs.
Rationalization of high tariffs may also encourage the ‘Make in India’ strategy,
as India is highly dependent on China and also other countries for its raw
materials supply chain.
Technical outlook: Nifty, Bank Nifty, and USDINR Future
Looking
ahead, whatever may be the narrative, technically Nifty
Future (CMP: 26050) now has to sustain over 26200-26300 for a further rally
towards 26500* and only sustaining above that further 26650/26800-27000/27500*
in the coming days; otherwise, sustaining below 26150, Nifty Future may slip to
26250/26000-25375*/24750 and 24400/24000*-23500/23100 in the coming days.
Technically,
Bank Nifty Future (59400) now has to sustain over 59800-60000* for a further rally to 60800*/61000
and a a further 61500/62000-63000/65750 in the coming days; otherwise,
sustaining below 59700-59300, BNF may fall to 58400/58000-57700/57100 and
56500/56100-55600/55000 and further 54500-54000 in the coming days.
Technically,
USDINR-I now (90.50) has to sustain over 91.00-91.50 for a further rally to 92.50-94.50 in
the coming days; otherwise, sustaining below 90.65/90.50-90.00, USDINR may
again fall to 89.50/89.00-88.00/87.50 and 87.00-86.50/86.00-85.50/85.00 in the
coming days.
Disclaimer:
· I have no position or plan to have any position in the above-mentioned financial instruments/assets within the next 72 hours.
· I am an NSE-certified Level-2 market professional (Financial Analyst- Fundamental + Technical) and not a SEBI/SEC-registered investment advisor.
· The article is purely educational and not a proxy for any trading/investment signal/advice.
· Please always consult with your personal financial advisor and do your own due diligence before any investment/trading in the capital market.
· I am a professional analyst, signal provider, and content writer with over ten years of experience.
· All views expressed in the blog are strictly personal and may not align with any organization with which I may be associated.
· If you want to support independent & professional market analytics, you may contribute to my PayPal A/C: asisjpg@gmail.com
· For any professional consultation about the financial market (EQ/COMM/FX), investment, trading ideas, and real-time, professional-grade (~90% perfect signals), please DM: ashishghoshjpg@gmail.com or ping me at Telegram id: asisjpg
· Professional consultation fees/trading/investment signals/short reports: @10$/day/symbol or $200/M/10 SYMBOLS
You may also check out: http://www.investing-referral.com/aff270.
