In a significant move that balances robust economic growth against softening inflation, the Reserve Bank of India's Monetary Policy Committee (MPC) announced a 25 basis points cut in the key repo rate on Friday, December 5, 2025. The decision, taken during the bi-monthly policy review in Mumbai, lowers the repo rate to 5.25 per cent, setting the stage for banks to reduce interest rates on various loans, including home, personal, and small business loans.
Revised Economic Projections Signal Strong Momentum
Bolstered by the economy's impressive performance, the MPC made substantial revisions to its annual forecasts. The committee raised the GDP growth projection for FY2026 to 7.3 per cent, a sharp 50 basis points increase from its previous estimate. Concurrently, the consumer price index (CPI) inflation forecast for the fiscal year was trimmed to 2 per cent from 2.6 per cent.
This optimistic revision follows an outstanding GDP expansion of 8.2 per cent in the July-September quarter of 2025, a significant jump from 5.6 per cent in the same quarter last fiscal. The first quarter had already seen a growth of 7.8 per cent, bringing the first-half (H1) growth for FY26 to a robust 8 per cent.
Inflation Trends and Policy Rationale
The rate cut decision comes amidst a period of rapidly moderating inflation. Headline CPI inflation eased dramatically to 0.25 per cent in October 2025 from 1.4 per cent in September. RBI Governor Sanjay Malhotra stated that the decline in inflation has become more generalised, driven by factors like deflation in food prices, the impact of GST rate cuts, and favourable base effects.
Governor Malhotra highlighted that economic activity in the first half of FY26 benefited from income tax and GST rationalisation, softer crude oil prices, front-loaded government capital expenditure, and supportive monetary conditions. He noted that rural demand remains robust while urban demand is recovering steadily, with private investment activity gaining healthy momentum.
Despite the rate cut, the MPC decided to retain its 'neutral' monetary policy stance, indicating that future rate movements will depend on evolving economic data. This stance was adopted in June 2025, shifting from an 'accommodative' position.
Implications for Borrowers, Savers, and the Economy
The immediate impact of the repo rate reduction will be felt by borrowers with loans linked to external benchmark lending rates (EBLR), which are directly tied to the repo rate. This means Equated Monthly Instalments (EMIs) for such loans are set to decrease. Lenders are also expected to revise interest rates on loans linked to the Marginal Cost of Funds-based Lending Rate (MCLR), though this transmission may be more gradual.
However, the news is less favourable for savers and pensioners, as deposit rates are also likely to decline following the policy signal. The rate cut decision was made even as the Indian rupee faced pressure, having slipped below the psychologically critical level of 90 against the US dollar earlier in the week. A depreciating currency typically raises concerns about imported inflation, making rate cuts a delicate balancing act for the central bank.
The RBI's move reflects a nuanced approach, leveraging the policy space created by persistently low inflation to support growth, even as the economy demonstrates strong inherent momentum. The central bank will continue to monitor global and domestic factors, including currency movements and inflation trends, to guide its future policy actions.
