Reserve Bank of India (RBI) is doing its part to uphold economic stability. One importantly symbolic step they’ve taken so far is lowering the one-year median Marginal Cost of Funds-based Lending Rate (MCLR) for scheduled commercial banks. This decrease, amounting to 45 basis points since February, reflects the central bank’s ongoing efforts to manage inflation and stimulate growth. Even RBI’s own medium-term inflation target of 4% seems more and more out of reach. According to the September Summary of Economic Projections, it is expected that inflation will remain under this level in the first half of next year.
The RBI has just come out with its latest quarterly assessment, predicting a sharp slowdown in GDP growth. It expects this to fall to 7% year-on-year in the fourth quarter of 2025, with further easing to 6.5% year-on-year in the first quarter of 2026. So how did the Indian economy pull off such a spectacular rebound in the third quarter of this fiscal year (FY24)? GDP grew strongly by an eye-popping 8.2%, despite rapidly changing monetary policy conditions.
Impact of Lending Rate Adjustments
And the very recent changes in lending rates are already starting to have significant impact on the market. Since October, when the RBI first decided to keep rates steady, the transmission of lending rates has picked up pace dramatically. The effective lending rate on new rupee loans has fallen by nearly 80 basis points. Over the same period, rates on the stock of outstanding loans have relaxed by about 60 basis points.
These adjustments are consistent with the RBI’s assessment of the growth-inflation trade-off, indicating space for more policy easing. Credit analysts expect a cut as high as 25 basis points in the one-year median MCLR. If approved, this change would take effect in the first quarter of 2026. This would make it even cheaper to borrow for consumers and businesses, encouraging investment and spending.
The recent cuts in the Goods and Services Tax (GST) were just announced in September. These cuts have been one of the most significant contributors to reducing price pressures. By far the biggest share of these reductions have been absorbed, and in many cases more than absorbed, by consumers resulting in lower prices for all household essentials. Prices for all but 12 of the 54 daily-use items the government regularly tracks have declined. This lowering of hidden taxes will go a long way toward maintaining consumer purchasing power as wider economic growth wanes.
Future Economic Projections
Looking forward, the RBI continues to have a guarded yet positive perspective on the trajectory of our economy. The central bank is projecting GDP growth to slow from 7.6% in 2025 to 6.5% in 2026. This expected slowdown is a welcome sign that the economy is rebalancing. It adapts to changes in domestic and international circumstances.
The RBI has a stated nominal inflation target of 4%. In fact, projections indicate inflation will stay well below this threshold through at least the first half of next year. These political and economic conditions have created the space for monetary easing. This gives policymakers the flexibility to respond proactively to changing economic conditions without losing sight of price stability.
Apart from homegrown factors, outside developments have the potential to influence India’s economic course. An India–US trade agreement is currently 70% likely. While this agreement would not erase the divisive backdrop of the new trade landscape, it could provide a much-needed injection of opportunity and positive prosperity.