MPC Slashes Repo Rate by 25 Basis Points to 5.25%
The Reserve Bank of India (RBI) Governor, Sanjay Malhotra, declared on Friday, December 5, 2025, that the Monetary Policy Committee (MPC) has unanimously resolved to lower the benchmark repo rate by 25 basis points to 5.25%. This latest monetary policy announcement, viewed as a significant breaking news update, comes against the backdrop of rapid disinflation and robust economic expansion in India. The committee also consented to maintain a neutral policy stance, signalling that future moves will be data-dependent rather than pre-committed in either an accommodative or tightening direction.
By opting for a calibrated 25 basis point reduction rather than a sharper cut, the MPC has attempted to strike a balance between supporting growth and preserving macroeconomic stability. The decision marks the latest step in an easing cycle that has already seen earlier reductions in February, April, and June, and is being closely tracked by markets, analysts, and borrowers looking for the latest development on interest rates and lending costs.
RBI Decision and Policy Stance
In his policy address, Governor Sanjay Malhotra underlined that the MPC voted unanimously in favour of a 25 basis point repo rate cut to 5.25%. The unanimous nature of the decision is important for policy credibility, as it reflects broad consensus within the committee about the evolving macroeconomic landscape. At the same time, the decision to retain a neutral stance indicates that the MPC is not committing to a prolonged easing cycle but will instead review fresh data on inflation, growth, and financial stability in every meeting.
The neutral stance provides flexibility. If inflation remains well below the 4% target and growth momentum moderates, the MPC retains room for further rate cuts. Conversely, if price pressures re-emerge or global financial conditions tighten meaningfully, the committee can pause or pivot without having to unwind an overly dovish forward guidance. This balanced approach makes the current decision both a supportive and cautious policy update.
Disinflation and Economic Outlook
Governor Malhotra remarked that since the October policy, the Indian economy has experienced swift disinflation. Average headline inflation for the second quarter of 2025-26 stood at 1.7%, slipping below the lower tolerance threshold of 2% for the first time since India adopted the flexible inflation targeting (FIT) framework. This is a historic development, as the FIT regime is built around a 4% headline inflation target with a tolerance band of 2% to 6%. The fall to 1.7% highlights the intensity of the disinflationary process underway.
The disinflation trend became even more pronounced in October 2025, when headline inflation slipped to just 0.3%. Retail inflation has been moving below 4% since February this year and fell to a historic low in October, aided by softening food prices and a favourable base effect. This benign inflation backdrop has effectively opened the door for the MPC to pursue an accommodative monetary policy while still staying within the framework of price stability mandated by law.
Goldilocks Phase: Low Inflation and Strong Growth
The Governor described the first half of the year as an uncommon “goldilocks period” for the Indian economy. Inflation has remained at a benign 2.2%, while economic expansion has held at a robust 8%. Real GDP growth reached 8.2% in the second quarter, underpinned by strong festive season spending and the rationalisation and standardisation of goods and services tax (GST) rates, which have supported consumption and business activity.
This combination of low inflation and high growth is rare in macroeconomic management. Typically, central banks must choose between fighting inflation at the cost of growth or supporting growth at the risk of higher prices. The current environment, however, allows the RBI to support expansion through lower policy rates without immediately worrying about inflation breaching the upper tolerance band. This is a key reason why the present decision is being closely watched as a major report in India's policy narrative.
Global Economic Conditions and External Environment
Malhotra noted that, worldwide, growth has been more robust than anticipated earlier in the year. However, shifting geopolitical dynamics and ongoing trade uncertainties continue to shape the global outlook. Inflation paths across major economies remain uneven: while headline inflation in many advanced economies still hovers above their respective targets, several emerging markets have managed to keep price pressures under better control, offering them more scope to run accommodative monetary policies.
The Governor also highlighted that global equity markets are being pulled in opposite directions by enthusiasm over artificial intelligence-driven productivity gains on the one hand and apprehensions about stretched valuations on the other. At the same time, divergence in the monetary policy paths of major central banks is adding to volatility in capital flows and yield spreads. For India, this external backdrop means the RBI must factor in potential spillovers even as it tailors the policy rate to domestic growth and inflation dynamics.
Liquidity Measures and Market Operations
Beyond the repo rate cut, the RBI announced a set of liquidity-enhancing measures to ensure that the transmission of the rate action to the broader financial system remains smooth. In view of evolving liquidity conditions and the near-term outlook, the central bank will conduct open market operation (OMO) purchases of government securities amounting to ₹1,00,000 crore during the month. These OMOs are intended to inject durable liquidity into the banking system and help stabilise bond yields.
In addition, the RBI has announced a three-year USD/INR Buy-Sell swap of $5 billion. This measure will support foreign exchange liquidity while also indirectly managing rupee liquidity conditions. Together, the OMO purchases and the FX swap constitute a comprehensive liquidity package that complements the policy rate reduction and reinforces the central bank's intent to keep financial conditions supportive. For markets tracking every latest development, these steps signal a proactive approach to liquidity management.
Revised Projections for Growth and Inflation
Taking into account the latest data and policy actions, the RBI has revised its macroeconomic projections for 2025-26. Real GDP growth is now estimated at 7.3%, which is 0.5 percentage points higher than the previous projection. This upward revision reflects stronger-than-expected momentum in domestic demand, particularly in private consumption and select segments of investment, supported by improved sentiment and easing financial conditions.
On the inflation front, the central bank has lowered its projection for CPI inflation to 2% for 2025-26, 0.6 percentage points below its earlier forecast. This downward adjustment mirrors the impact of the ongoing disinflation, softer food prices, and the absence of large supply shocks in recent months. However, the Governor underlined that the RBI remains watchful of upside risks, including the possibility of renewed food price volatility or imported inflation via commodity prices and exchange rate movements.
Previous Rate Reductions and Evolving Policy Cycle
The latest repo rate cut is part of a series of easing moves undertaken in response to the easing inflation trend. Based on earlier MPC recommendations, the RBI reduced the repo rate by 25 basis points each in February and April, followed by a larger 50 basis point reduction in June. These earlier policy decisions were taken as consumer price inflation began to move consistently below the 4% target, providing room to support growth without compromising price stability.
Together with today's action, these moves have substantially lowered borrowing costs across the economy compared to the levels seen before the disinflation phase began. Transmission to bank lending and deposit rates typically occurs with a lag, but the sustained sequence of cuts, combined with ample liquidity, is expected to accelerate this process, making the current policy stance a key breaking news storyline for households and businesses.
Impact on Borrowers, Banks, and Key Sectors
For retail borrowers, the repo rate cut to 5.25% is likely to translate into lower equated monthly instalments (EMIs) over time on home loans, auto loans, and other floating-rate credit, particularly those linked directly to external benchmarks like the repo rate. As banks adjust their lending rates downward, the cost of fresh borrowing is expected to ease, providing some relief to households and improving affordability in interest-sensitive sectors such as housing and automobiles.
For banks, the combination of lower policy rates and additional liquidity via OMO purchases and FX swaps will help support credit growth and improve the environment for balance sheet expansion. However, banks will need to manage the impact on their net interest margins as lending rates decline faster than deposit costs in some cases. Corporates, especially those with significant borrowing requirements, may benefit from lower funding costs, which can encourage fresh investment decisions and capex plans as part of the broader growth update.
Outlook for the Rest of 2025-26
Looking ahead, the trajectory of India's monetary policy will depend on how inflation, growth, and global financial conditions evolve over the coming quarters. With real GDP expansion estimated at 7.3% for 2025-26 and CPI inflation projected at just 2%, the macroeconomic setting currently appears supportive of a growth-friendly policy stance. At the same time, the MPC has clearly signalled that it will remain vigilant and responsive to incoming data, ensuring that financial stability and the inflation target are not compromised.
For now, the decision to slash the repo rate to 5.25%, backed by substantial liquidity measures and upgraded growth projections, stands out as one of the most significant monetary policy reports of the year. Markets, lenders, and borrowers alike will be watching future MPC meetings closely for further signals on how long this supportive interest rate environment is likely to last.
