As the current RBI Governor marks one year in office, the Indian economy is surprisingly resilient amid global uncertainties, including trade disputes and geopolitical conflicts. The Governor has termed this moment a "rare goldilocks period," characterized by an inflation rate of just 2.2% and a GDP growth rate of 8% in the first half of 2025-26.
This favorable economic phase has been developing over time. Retail inflation has decreased consistently over the past three years, while GDP growth has averaged 8.2% over four and a half years. Excluding the recovery year of 2021-22, the growth rate has averaged 7.8% between 2022-23 and Q2 of 2025-26.
Currently, India's economy is experiencing a unique goldilocks phase, marked by low inflation and robust growth, despite a 5% depreciation of the rupee in 2025, crossing the 90-per-dollar threshold. Economists argue that this depreciation does not pose a monetary policy challenge, and the RBI has wisely refrained from intervening aggressively to defend the currency.
The RBI's decision to cut the repo rate by 25 basis points to 5.25% demonstrates its commitment to policy consistency. Analysts note that the central bank would tighten rates if inflation exceeds 6% for six months, hence it should ease rates when inflation remains below 2% for a similar duration. With current inflation well below the RBI's target band of 2-6%, the rate cut supports its objective of maintaining inflation around 4% in the medium term.
The recent report indicates that inflation in 2025 has fallen more rapidly than anticipated, breaching the lower tolerance band for the first time since the inception of the flexible inflation-targeting framework. This widespread disinflation has significantly broadened the RBI's policy options, permitting the Monetary Policy Committee to implement rate cuts without risking economic overheating.
The RBI's rationale for additional rate cuts stems from the belief that the decline in inflation is structurally supported. The central bank aims to bolster domestic demand in light of slowing global trade, rising financial volatility, and ongoing geopolitical tensions. The decision to cut rates in December aligns with cumulative easing trends and the evolving macroeconomic landscape.
Despite an unexpected GDP growth of 8.2% in July-September, the RBI unanimously executed a rate cut and revised its 2025-26 inflation forecast down to 2%, indicating flexibility in its future guidance. Economists anticipate another rate cut in February, as underlying price pressures appear weaker than indicated by headline inflation.
However, growth is expected to moderate in the latter half of 2025-26 due to reduced government spending and the effects of U.S. tariffs on Indian exports. The RBI acknowledges a projected GDP growth drop to 7% in Q3 and 6.5% in Q4 of this fiscal year.
While the current growth and inflation conditions are favorable, the significant depreciation of the rupee poses challenges. The RBI Governor has refrained from directly addressing the currency's decline during his policy statements, emphasizing that market fluctuations are typical, and intervention occurs only during "abnormal" volatility.
Under the current leadership, India’s exchange rate management has evolved significantly. The IMF recently reclassified India's regime from "stabilized" to a "crawling arrangement," suggesting that increased flexibility will enhance the economy's capacity to withstand external shocks.
Despite growing concerns about whether this goldilocks phase will endure once new GDP and inflation data are released in February 2026, the RBI's current approach aims to balance domestic growth momentum against potential global risks.
Q1. What is the Goldilocks phase in economics?
Answer: The Goldilocks phase refers to a period of economic stability characterized by low inflation and robust growth, making conditions favorable for economic activities without overheating.
Q2. How does the RBI's rate cut affect the Indian economy?
Answer: The RBI's rate cut lowers borrowing costs, encouraging investment and consumer spending, which can stimulate economic growth while keeping inflation in check.
Q3. Why is the rupee's depreciation concerning for India?
Answer: A depreciating rupee can increase import costs, lead to inflation, and affect trade balances, posing challenges for economic stability.
Q4. What factors contribute to the RBI's monetary policy decisions?
Answer: The RBI considers inflation trends, GDP growth rates, exchange rates, and global economic conditions when making monetary policy decisions.
Q5. How does global trade impact India's economic outlook?
Answer: Global trade dynamics can influence India's exports, inflation rates, and overall economic growth, making it crucial for the RBI to monitor these trends closely.
Question 1: What is the primary goal of the RBI's monetary policy?
A) Increase inflation
B) Control inflation and ensure growth
C) Stabilize the rupee
D) Reduce government spending
Correct Answer: B
Question 2: During which economic phase is inflation typically low and growth stable?
A) Recession
B) Goldilocks phase
C) Boom phase
D) Stagnation
Correct Answer: B
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