In its December 2025 meeting, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) made a significant decision by cutting the repo rate by 25 basis points, bringing it down from 5.50% to 5.25%. This unanimous decision marks a pivotal moment in India’s monetary policy landscape, as it reflects a deliberate strategy to foster economic growth while maintaining low inflation rates. Source
Understanding the Repo Rate and Its Impact
The repo rate is the interest rate at which the RBI lends money to commercial banks, influencing borrowing costs across the economy. When the repo rate decreases, banks can offer lower interest rates on loans, subsequently leading to cheaper Equated Monthly Instalments (EMIs) for consumers. This potential for reduced financial burdens has sparked optimism among borrowers and the real estate sector, leading to discussions about more affordable home loans.
Key Decisions at a Glance
The MPC, during its 58th meeting from December 3-5, 2025, chaired by RBI Governor Sanjay Malhotra, put forward several important changes:
- Repo rate: Cut from 5.50% to 5.25%
- Standing Deposit Facility (SDF) rate: Now 5.00%
- Marginal Standing Facility (MSF) & Bank Rate: Now 5.50%
- Policy stance: Maintained at Neutral (no shift towards an accommodative stance)
- Real GDP Growth Forecast for FY 2025-26: Raised to 7.3%
- Inflation forecast for FY26: Cut to 2% from 2.6%
- Q2 FY26 GDP growth: Projected at around 8.2%, marking a six-quarter high
- Headline CPI Inflation (October 2025): Recorded at a historic low near 0.25%, primarily driven by lower food prices
Why Did RBI Cut Rates Despite Strong Growth?
According to Governor Malhotra, India is currently experiencing what he termed a Rare Goldilocks Period, characterised by robust economic growth coupled with low inflation rates. This unique situation allowed the RBI to cut interest rates while still projecting strong growth for the economy.
- Inflation is exceptionally low
In October 2025, the Consumer Price Index (CPI) inflation dropped unexpectedly to an all-time low of 0.25%, largely due to favourable corrections in food prices. This unexpected decline in inflation prompted the RBI to revise its annual inflation forecast downwards to 2.0%, granting the central bank the latitude to prioritise growth. - The Economy is Growing Strong
Despite external economic challenges, India’s domestic economy has demonstrated remarkable resilience. The real GDP experienced an impressive growth rate of 8.2% in the second quarter of 2025-26, the highest in six quarters. Demand from both rural and urban sectors remains strong, leading the RBI to increase its GDP growth forecast for FY 2025-26 to 7.3%. This robust growth, bolstered by healthy agriculture, steady manufacturing, and a thriving services sector, instilled confidence in the MPC to lower the interest rate.
This strong growth, supported by factors like healthy agriculture, steady manufacturing, and strong services sectors, gave the MPC the confidence to reduce the interest rate.
What This Means for Your Wallet
The rate cut is especially helpful for credit-sensitive sectors and consumers:
- Home Loans Get Cheaper: The cut in the repo rate will likely make home loans cheaper, creating significant implications for consumers and industries sensitive to interest rates. This reduction is expected to encourage housing demand, particularly in the mid-income and premium segments.
- Investments and Spending: This rate cut is expected to encourage private spending and investment, further stimulating economic growth. The automotive and real estate sectors are projected to benefit significantly from this reduction.
- Fixes Deposits Interest Rates Might Dip: However, potential investors in Fixed Deposits (FDs) should act quickly, as banks may soon lower interest rates on new deposits in response to the reduced repo rates.
Looking Ahead: Ensuring Effective Transmission
The MPC has opted to maintain a ‘Neutral’ policy stance, indicating that it will keep its options open for future rate decisions. Governor Malhotra emphasised the crucial need for effective transmission of the rate cut into the real economy. The RBI is taking proactive measures to ensure that this monetary easing reaches businesses and consumers alike.
To facilitate this, the RBI has announced liquidity-supporting measures, including Open Market Operations (OMO) to purchase government bonds worth ₹1 lakh crore and a $5 billion three-year dollar-rupee buy/sell swap. Together, these actions are expected to inject approximately ₹1.45 lakh crore into the economy, enhance the efficacy of the rate cut, and stimulate economic activity.
Also Read: Fixed Income Market 2025: Key Highlights & Market Outlook
Conclusion
The RBI demonstrates its commitment to sustaining growth and controlling inflation by strategically cutting rates during this pivotal moment of economic strength. By creating an environment that supports lower borrowing costs, the RBI aims to propel the Indian economy forward, ensuring that the benefits of its monetary policy reach every part of the nation.
Disclaimer: This information is from the Reserve Bank of India (RBI) and is for general informational purposes only. It is not investment advice. The article is written by Yogesh Verma. Yogesh Verma is a Mutual Fund Distributor (ARN-245560). Please note that mutual fund investments carry market risks. Make sure to read all related documents carefully before investing.
