The Reserve Bank of India (RBI) slashed its key repo rate by 25 bps (basis points) on Friday (Dec 5) and did not rule out easing more while it took steps to boost the liquidity of the banking sector to the tune of US$16 billion in order to support a “Goldilocks” economy.

The world’s fifth-largest economy is being harassed by punitive tariffs by US President Donald Trump, widening its trade deficit and lowering its currency to an all-time low.

Global headwinds have catalysed the renewed wooden Indian Prime Minister Narendra Modi’s administration to step up domestic economic reforms, including paring consumer taxes, changing labour rules, and easing financial-sector regulations.

The RBI’s six-member monetary policy committee voted unanimously to cut the repo rate to 5.25 per cent in line with a consensus view and kept the stance of “neutral”, which indicated scope for further rate cuts.

The central bank has now slashed the rates by a combined total of 125bps since February of 2025, which is the most aggressive rate easing since 2019. These held rates in August and October.

The Indian economy was in a “rare Goldilocks” period, RBI governor Sanjay Malhotra said in a video address.

Since October, India’s economy has had rapid disinflation, which resulted in a violation of the lower threshold of tolerance under the central bank, and in that case, growth was very high, said Malhotra.

Given these macroeconomic conditions, there is “policy space” to support growth, he said. Malhotra said later at a post-policy press conference that: “We expect the policy rates to be low as inflation remains benign.”

Garima Kapoor, economist at Mumbai-based Elara Securities, expects another rate cut because “there are no indications of overheating in the economy”.