Another 25-basis-point policy rate cut likely in February MPC: Bank of Baroda economist

New Delhi [India], December 5 (ANI): There is a high probability that Reserve Bank of India (RBI) would go for another rate cut in the next monetary policy review meeting in February 2026, Bank of Baroda said in a report Friday, hours after the central bank Governor Sanjay Malhotra characterised India's current macroeconomic moment as a "rare goldilocks period".

The RBI Governor in his MPC statement noted that a "rare goldilocks" opportunity was provided in H1 2025-26 with solid growth and benign inflation.

"This largely motivated the RBI to reduce its policy rate by 25bps. Inflation outlook is largely optimistic with continued moderation in food prices and rangebound core inflation," Bank of Baroda Economist Aditi Gupta wrote in the report.

On the other hand, growth prospects though bright, face some pressures due to the drag from higher US tariffs, she noted.

"RBI's assessment places H2 growth at 6.8 per cent and inflation at an average rate of 1.6%, which provides an opportunity for a rate cut. We now expect that there is a high probability that the RBI is likely to follow up this rate cut with another in Feb'26, which will be the last in this monetary easing cycle. We can hence see the terminal repo rate at 5.0 per cent," she added.

"More importantly, while the RBI sees some risks to the growth outlook from trade related uncertainties, it remains confident on the inflation trajectory. This makes us revisit our base scenario of the terminal rate settling at 5.25%. We now believe that there is a high probability of a further cut of 25bps in Feb'26, which will mark an end to its rate cut cycle," the Bank's report added.

RBI Governor Sanjay Malhotra on Friday characterised India's current macroeconomic moment as a "rare goldilocks period", that currently marks high economic growth and exceptionally low inflation.

The remarks came as the Reserve Bank announced its latest monetary policy decision, cutting the repo rate by 25 basis points to 5.25 per cent, after the three-day review meeting that concluded today.

Inflation fell even further to exceptionally low of 0.3 per cent in October 2025, driven by a sharp decline in food prices. Nearly 80 per cent of the CPI basket is now recording inflation below 4 per cent, pointing to a broad-based softening across goods and services.

The RBI revised its CPI inflation forecast for 2025-26 to just 2.0 per cent, down from previous estimates.

Quarterly projections show inflation at 0.6 per cent in Q3 and 2.9 per cent in Q4, before rising to 3.9 per cent in Q1 2026-27 and 4.0 per cent in Q2, still within the central bank's 2-6 per cent target range.

The RBI raised India's GDP growth projection at 7.3 per cent for the full year, up by half a percentage point. India's real GDP expanded 8.2 per cent in Q2 2025-26, fuelled by robust consumption and aided by GST rate rationalization exercise of September 2025.

Given the favourable growth-inflation balance, the MPC unanimously voted for a 25-bps rate cut, maintaining a neutral stance.

To aid liquidity, the RBI announced Rs 1 lakh crore of OMO purchases and a 3-year USD 5 billion buy-sell swap this month, measures that will "ensure adequate durable liquidity in the system and further facilitate monetary transmission."

"These measures are likely to infuse additional liquidity of Rs. 1.45 lakh crores in the system," Aditi Gupta said in the report. (ANI)

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