MPC Finds Comfort in Benign Inflation, Reinforces Growth Momentum

The minutes of the Monetary Policy Committee’s December meeting reveal a clear evolution in the Reserve Bank of India’s policy thinking. While earlier meetings reflected differences on the timing and signalling of further easing, the latest deliberations show broad convergence on two assessments, inflation is expected to remain decisively benign, and the economy faces sufficient headwinds to justify policy support aimed at sustaining growth and stimulating demand.

There was little concern among MPC members that an additional reduction in the policy rate could trigger overheating. Headline inflation has fallen sharply, reaching just 0.3% in October, with full-year inflation for 2025–26 projected at around 2%. Several members observed that even this low reading overstates underlying price pressures, as precious metals have inflated both headline and core measures. Excluding gold and silver, inflation momentum appears even weaker, pointing to subdued demand rather than excess heat in the economy.

RBI Governor Sanjay Malhotra framed the debate crisply. With food prices low, agricultural output strong, and international commodity prices exceptionally benign, inflation risks are skewed to the downside in the near term. Core inflation, particularly after excluding precious metals, has remained consistently below target, suggesting demand pressures are minimal and likely to remain so over the next few quarters. In this setting, real interest rates were increasingly viewed as higher than warranted, strengthening the case for a calibrated reduction in the nominal policy rate.

RBI Deputy Governor Poonam Gupta argued that the combination of low inflation across nominal indicators and slowing momentum in select activity metrics points to slack in the system. From a flexible inflation targeting perspective, such conditions warrant a stronger policy response in favour of growth, rather than an overly cautious stance driven by theoretical fears of overheating of the economy.

Growth concerns featured prominently in the discussion. While headline GDP growth remains robust, members pointed to emerging signs of deceleration beneath the surface. Nagesh Kumar highlighted the impact of geopolitical and trade-related uncertainties, particularly US tariff actions, on labour-intensive export sectors such as textiles, garments, leather, gems and jewellery, and processed foods. These sectors are dominated by MSMEs and account for a disproportionate share of manufacturing employment, raising risks not only to exports but also to jobs and domestic demand.

Export softness too was a recurring theme in the minutes. Indranil Bhattacharyya noted that while high-frequency indicators suggest the economy is holding up in the near term, several leading indicators point to moderation ahead, with growth projected to ease to around 6.8% in the second quarter of 2026-27. Against this backdrop, the case for counter-cyclical monetary support has strengthened.

Saugata Bhattacharya observed that lending rate transmission to both fresh and outstanding loans has been satisfactory and broad-based, particularly benefiting small and medium enterprises.  

Fiscal actions provided additional reassurance. GST reforms, export promotion schemes, credit guarantees, and labour code notifications were widely cited as growth-supportive. The prevailing view was that coordinated fiscal and monetary actions have historically proved effective, and with fiscal measures already in motion, monetary policy should reinforce rather than lag the growth impulse.

Crucially, the committee downplayed concerns that a rate cut could destabilise the external sector or stoke imported inflation. While acknowledging exchange rate pressures and portfolio outflows, members pointed to India’s strong macro fundamentals, subdued global commodity prices, and China’s excess capacity acting as a global disinflationary force. These factors, in their assessment, significantly limit inflation pass-through from currency movements.

The December minutes reflect a decisive shift in emphasis. With inflation expected to remain well-behaved and demand conditions still fragile, most members saw a clear need for policy action to support growth and prevent a broader slowdown. The 25-basis-point cut was less a response to past weakness than a pre-emptive move to reinforce momentum, stimulate demand, and ensure that the rare window of disinflation is used to stabilise the cycle rather than squandered.