After 125 bps cut, regulatory relaxations, all eyes on more growth push from RBI in 2026

Mumbai: The Reserve Bank cut its key rates at four of the six monetary policy reviews of 2025 by a cumulative 1.25 per cent, courtesy inflation touching record lows, in what the newly appointed Governor Sanjay Malhotra called as a “rare Goldilocks period” for the economy.

Malhotra cut the key rates right from his first policy announcement in February to support growth, and also slashed key rates by 0.50 per cent in June as it saw the space created by lower inflation.

Completing a year in office, the career bureaucrat-turned-central banker termed it as a “rare goldilocks period” for India, with growth exceeding 8 per cent despite headwinds like the US tariffs and geopolitical changes, and inflation under 1 per cent.

He also made it clear that growth will soften going ahead, and inflation will inch up closer to the RBI’s target of 4 per cent.

Amid concerns on the nominal GDP growth remaining low, Malhotra said the Reserve Bank of India’s (RBI’s) actions are dictated by the real GDP arrived at after subtracting the inflation levels.

Actual inflation outcomes came much lower than the RBI’s projections on price rise, leading to some voices of concern on the central bank’s forecasting, and Poonam Gupta, an academic who got inducted during the year, said there are no systemic biases in the estimation.

The RBI’s actions on rates, accompanied with explicit expectations of borrowing costs going down, came as a jolt for banks, which were impacted by narrowing in the net interest margins (NIMs) and a subsequent dent to core incomes.

Tempering the impact were central bank’s moves on ensuring adequate liquidity in the system and more importantly, regulatory relaxations.

At his maiden press outing in February after announcing a 0.25 per cent cut in rates, Malhotra underlined that while financial stability is important, the “cost of regulations” should also be taken on board and committed to lessen the impact of RBI’s moves.

What followed through the year was a slew of relaxations. The crescendo was the October policy announcement with 22 regulatory measures, including some initiatives uncharacteristic of an otherwise conservative institution.

Some, like allowing banks to fund India Inc’s global acquisitions or going back on the “forms of business” regulation draft under which the RBI had mulled preventing banks from having other entities engaged in same activities or tweaks on the infra finance front, led to the obvious questions on financial stability.

However, Malhotra justified this and affirmed that financial stability is the foremost priority for the central bank and spoke of the need to ensure that regulations are not impeding economic growth and added that sufficient precautions have been built into the new relaxations.

Interestingly, the announcement on acquisition finance came within weeks of SBI Chairman C S Setty publicly pitching for such a move.

The RBI also climbed down on its previously mulled draft on project finance requiring banks to set aside up to 5 per cent provisions on loans.

The move was flagged as a challenge by bankers, but the RBI brass had maintained that this was “conservative” given the previous experiences with lending to the segment.

Apart from the regulatory relaxations, banks got a big breather in the form of almost no major supervisory action from the RBI this year, a departure from the central bank’s actions under Malhotra’s predecessor Shaktikanta Das, where even major lenders were slapped with cease-and-desist orders.