The Reserve Bank of India (RBI), under its newly appointed Governor Sanjay Malhotra, embarked on an aggressive monetary easing cycle in 2025, slashing its key policy rates at four out of six reviews. The cumulative reduction for the year stood at a significant 1.25 percentage points, a move primarily driven by inflation plummeting to record lows. Governor Malhotra characterized this unique economic phase as a "rare Goldilocks period" for the nation.
A Year of Aggressive Monetary Support
Sanjay Malhotra, the career bureaucrat-turned-central banker, signalled his growth-focused approach right from his first policy announcement in February 2025 with a rate cut. The most substantial single reduction came in June, when the RBI cut rates by 0.50 per cent, leveraging the space created by persistently low inflation. Completing a year in office, Malhotra highlighted that the economy grew at over 8 per cent despite global headwinds like US tariffs and geopolitical shifts, while inflation remained under 1 per cent.
However, he tempered optimism with caution, indicating that growth would likely soften going forward. He also projected that inflation would gradually rise closer to the RBI's medium-term target of 4 per cent. Addressing concerns about low nominal GDP growth, Malhotra clarified that the central bank's policy actions are guided by real GDP figures, which are adjusted for inflation.
Regulatory Reforms and Banking Sector Impact
The RBI's rate-cutting spree, coupled with explicit guidance that borrowing costs would fall, initially jolted the banking sector. Banks faced pressure on their net interest margins (NIMs), which dented their core income. To mitigate this impact, the RBI ensured ample system liquidity and, more notably, unveiled a series of significant regulatory relaxations.
At his maiden press conference in February, Governor Malhotra emphasized that while financial stability was paramount, the "cost of regulations" needed consideration. He committed to lessening the operational burden of RBI's actions on banks. This philosophy culminated in the October policy announcement, which featured a remarkable 22 regulatory measures. Some were uncharacteristic of the traditionally conservative institution, such as:
- Allowing banks to finance Indian corporations' global acquisitions.
- Revisiting the draft "forms of business" regulation that contemplated restricting banks from having entities in similar activities.
- Introducing tweaks to infrastructure financing norms.
These moves raised questions about financial stability, but Malhotra defended them, asserting that sufficient safeguards were embedded and that regulations must not impede economic growth. The RBI also retreated from a earlier draft on project finance that required higher provisions, acknowledging bankers' concerns.
Forex Challenges and Future Roadmap
One of the major challenges for the RBI in its 90th year was managing the rupee, which breached the 90 against the US dollar mark. The central bank, maintaining its stance against defending a specific level but aiming to curb volatility, sold over $38 billion of its foreign exchange reserves in the first nine months of 2025 to stabilize the currency.
Governor Malhotra pointed to the substantial forex reserves exceeding $690 billion and a manageable current account deficit as key buffers. However, experts believe currency management will remain a complex task for the central bank in the near term.
As the year ended, key questions lingered, including the status of Tata Sons regarding its listing obligation after the September 2025 deadline. Looking ahead to 2026, the focus will be on measures to accelerate growth using monetary and other tools. Governor Malhotra's outlook suggests that inflation is expected to stay manageable, and policy rates are likely to remain low for a prolonged period.
