RBI Cut Repo Rate by 25 bps to 5.25% Amid Easing Inflation

A calibrated 25 bps rate cut signals a new phase in India’s monetary cycle

In a year marked by a historic rupee slide past 90 against the US dollar, softening inflation, and resilient GDP momentum, the Reserve Bank of India has opened a new chapter in its policy playbook.

At its December meeting, the Monetary Policy Committee (MPC) led by Governor Sanjay Malhotra voted unanimously to cut the repo rate by 25 bps to 5.25%, maintaining a neutral stance.

This is the latest step in an easing cycle that has now delivered 100 bps of cumulative cuts since February 2025, when the repo rate stood at 6.5%.

The message was clear: inflation is no longer the dominant risk growth stability is.

Why the RBI Cut Rates Now

1. Inflation Has Decisively Softened

India’s retail inflation continues to glide downward sharply, falling to a record low of 0.25% in October 2025, from 1.54% in September. This disinflation has been driven by lower food prices, strong agricultural output prospects, corrections in global commodity markets, and improved domestic supply conditions.

With FY26 average CPI now at just 1.9% well below the RBI’s 2.6% projection and comfortably within the 2–6% target band the central bank found ample room to stimulate borrowing and investment through a calibrated 25 bps rate cut.

2. Growth Is Holding Firm

India’s GDP growth remains robust, driven by:

• strong domestic consumption,
• consistent government capex, and
• resilient corporate balance sheets.

This stability allowed the MPC to shift toward supporting the next leg of economic expansion without risking macro overheating.

3. Rupee Pressures Needed a Calibrated Response

The rupee slipping beyond ₹90 per USD needed the RBI’s attention. Normally, the RBI could raise interest rates to attract foreign money and strengthen the rupee, but doing that now would tighten liquidity and hurt growth.

So instead of hiking rates, the RBI used liquidity tools like OMOs and a $5 billion FX swap to support the rupee while still keeping borrowing conditions easy.

WHAT THIS DECISION MEANS FOR YOU

1. Borrowers Will See Gradual EMI Relief

Floating-rate home, auto, and personal loans may see reductions as banks pass on the rate cut in phases.

2. FD Rates May Soften Gradually

As lending rates come down, banks may reduce fixed deposit (FD) interest rates in the coming months, especially on longer tenures. Existing FD holders remain unaffected, but new depositors may see slightly lower returns as the system adjusts to easier monetary conditions.

Key Policy Announcements

25 bps Repo Rate Cut to 5.25%

Borrowing costs are now set to ease across the economy, nudging credit demand and supporting cyclical sectors such as housing, autos, and manufacturing.

₹1 Lakh Crore OMO Purchase Program

The RBI will buy government bonds worth ₹1 lakh crore through Open Market Operations (OMOs). This simply means the RBI gives banks money in exchange for their bonds, increasing liquidity in the system. More liquidity helps banks lend more easily and prevents interest rates from rising.

This aims to:

• inject durable liquidity,
• support government borrowing needs,
• ease bond market conditions, and
• keep yields from rising prematurely.

$5 Billion Dollar–Rupee Buy–Sell Swap (3 Years)

A foreign-exchange swap helps the RBI release more rupees into the market without creating sudden swings in the currency.

The RBI does this by selling dollars now and agreeing to buy them back after three years, which increases rupee supply in a controlled, predictable way.

This tool effectively protects the rupee while keeping the domestic money market well-supplied.

Policy Stance: Neutral

A neutral stance gives the RBI freedom to move either way depending on incoming data — signalling data dependency, not a pre-commitment to a full easing cycle.

What the Decision Means for the Economy

1. Corporate Borrowing and Capex Could Accelerate

Lower funding costs combined with liquidity expansion could revive investment in manufacturing, infrastructure, logistics, and real estate.

2. NBFCs Gain Breathing Room

Easier liquidity reduces funding pressure on NBFCs, improving credit flow to retail and SME segments.

3. Bond Market Stability Improves

OMO purchases act as a backstop for yields, reducing uncertainty in government securities and aiding financial institutions.

Risks & Watchpoints Ahead

The path forward is not without uncertainties. Key factors to monitor include:

1. Food Price Volatility
   A poor harvest or supply shocks could disrupt the disinflation trend, prompting the RBI to pause further cuts.
2. External Pressures on the Rupee
   Geopolitical tensions, commodity spikes, or stronger foreign tightening cycles could intensify currency pressures.
3. Transmission of Rate Cuts
   Banks’ willingness to reduce lending rates will shape the real economic impact of today’s move.
4. Fiscal Announcements in the Union Budget
   Signals on capex, deficit control, and borrowing requirements will heavily influence the RBI’s next steps.

What to Expect in 2026

If inflation remains contained and external risks manageable, another 25 bps cut early next year is possible but not guaranteed.

The RBI will prioritise:

• price stability,
• financial market calm, and
• stable capital flows.

The December meeting signals an RBI that is supportive but vigilant, easing conditions without compromising macro stability.

Conclusion

The December 2025 RBI MPC outcome marks a decisive shift toward a more growth-oriented yet disciplined monetary approach.

With a 25 bps rate cut, ₹1 lakh crore OMOs, and a $5 billion FX swap, the RBI has delivered a carefully balanced policy: easing liquidity and supporting demand while actively managing financial stability risks.

For households, businesses, and markets, this policy sets the tone for 2026 — a year in which India aims to sustain strong growth while navigating a volatile global environment.