The RBI on Friday launched 2025's last burst of fire reducing the repo rate by 25 bps.

The benchmark overnight repo rate now stands at 5.25%.

Besides cutting rates, the central bank also concluded that India's economy is fit to bust, so it raised FY26 real GDP growth to 7.3% and as prices continue to plunge nicely with a parachute hugging sub-zero levels, FY26 headline inflation is pegged at 2%.

With the first half of growth settling at 8% followed by an inflation print of 2.2%, RBI's Monetary Policy Committee (MPC) seized the rare goldilocks period to keep the economy going.

Above all, maintaining adequate durable liquidity, Governor Sanjay Malhotra announced Rs 1 lakh crore worth open market purchases besides 3-year dollar-INR buy-sell swaps to ensure liquidity infusion.

In what seemed like a distressed sellers market with both equities and the domestic currency being mauled by bears, Friday's monetary policy decisions sent relief coursing through the veins. Sensex jumped 300 points, besides perking up the rupee's enthusiasm. On Friday, the domestic unit opened higher at 89.69.

The repo rate cut wasn't expected. In fact, the probability of a reduction evaporated completely from analysts' view amid strong Q2 growth, but RBI sprang a surprise, cutting rates before the economy weakens too much.

While growth in the first half of the current fiscal surprised on the upside, some high-frequency indicators are emerging as the toughest fighters in the ring.

For instance, manufacturing PMI eased to 56.6 in November from a robust 59.2 in October, or the slowest pace in nine months. The IIP growth also slowed sharply to 0.4% in October from 4.6% in September. A substantial decline in merchandise exports of 11.8%, moderation in government capex coupled with what appears to be a broad-based industrial slowdown with manufacturing printing lower at 1.8% down from 5.6%, followed by mining and electricity that registered a de-growth suggests the likelihood of a sting-in-the-tail scenario.

Moreover, the economy is expected to just purr quietly in the second half with Q3 and Q4 growth pegged at 7% and 6.5%, respectively. As for Q1 and Q2, FY27, real GDP growth is estimated at 6.7% and 6.8%, respectively.

From 8% growth in H1, FY26, to sub-7% in H2 may not seem as dire as going from a soaring economy to souring growth. Yet, the slow pace makes the December policy a potential inflection point and the RBI wasted no time in responding with a calibrated cut to stimulate output, while aligning the monetary policy with the ongoing disinflation regime.

Until Friday morning, markets remained certain that RBI would pause and hold the next phase of reduction, as the domestic macro picture is not as straightforward. Even though inflation is easing, nominal GDP growth is softening, real rates have risen, and global central banks are moving into an easing cycle—and all of these cleared space for RBI to deliver a 25 bps cut.

That said, external factors including US tariffs and slowing global growth are likely to weigh on industrial production. However, consumption is expected to remain healthy on account of robust rural incomes, low inflation, and policy support both from fiscal and monetary policy.

Meanwhile, for the first time since the start of the Flexible Inflation Targeting regime, average headline inflation registered 1.7% in Q2, breaching the lower tolerance threshold of 2%. Further in October, it dipped to another new low of 0.5% with Q3 print estimated at 0.6%, which perhaps could be an all-time low. However, Q4 inflation will likely rise to 2.9%. Likewise, Q1 and Q2 of FY27 will see inflation settling at 3.9% and 4% respectively.