Blitz Bureau
NEW DELHI: The Reserve Bank of India (RBI) has cut its benchmark repo rate by 25 basis points —from 5.5 per cent to 5.25 per cent — marking the second reduction in six months and signalling a calibrated shift toward supporting growth amid record-low inflation and a weakening rupee.
The decision was announced by RBI Governor Sanjay Malhotra on December 5 after the Monetary Policy Committee (MPC) voted unanimously for the reduction and retained its neutral policy stance.
The repo rate (short for repurchase rate) is the rate at which the RBI lends short-term money to commercial banks.
The repo rate reduction is expected to offer relief to retail borrowers, especially those servicing home and auto loans linked to external benchmarks. EMIs that rose sharply during the tightening cycle between 2022 and 2024 may now begin to soften.
But analysts caution that the transmission could be dampened by the liquidity environment in the banking system. Many banks have been dealing with tight liquidity conditions, and deposit growth continues to trail credit growth.
The cut comes at a delicate moment. Inflation has been softening steadily over the past year, with both headline and core readings well within RBI’s comfort band. But the rupee touched a new low against the dollar last week, raising concerns about whether easing monetary conditions could further weaken the currency. Governor Malhotra, however, emphasised that the current inflation backdrop allowed the central bank room to support economic momentum.
“The growth–inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum,” Malhotra said. “Accordingly, the MPC unanimously voted to reduce the policy repo rate to 5.25 per cent. The stance remains neutral.”
The central bank expressed optimism about economic activity, projecting real GDP growth at 7.3 per cent for 2025–26. Growth is expected to moderate slightly from 7.0 per cent in the third quarter to 6.5 per cent in the fourth. For the first two quarters of 2026-27, the RBI estimates growth at 6.7 per cent and 6.8 per cent, respectively, with risks assessed as evenly balanced.
Economists say these projections reflect the RBI’s confidence that India’s growth momentum remains strong despite global uncertainties.
Dr. Arvind Subramaniam, former chief economic adviser, said the RBI’s move reflects confidence in the structural decline of inflation.
“The timing of the cut indicates the RBI is convinced that the disinflation trend is durable. Headline and core numbers have held steady for months, giving the central bank room to boost demand without stoking price pressures. But this will require careful management if the rupee continues to weaken.”
Dr. Ila Menon, senior economist at the Centre for Macroeconomic Studies, called the decision ‘measured but risky.’ “The cut supports growth at a time when private investment is still hesitant. However, the rupee hitting new lows just a day before the announcement raises legitimate concerns. The MPC will have to balance domestic growth needs with external sector stability. A sharper depreciation could force the RBI to pause the easing cycle sooner than markets expect.”
Prof. Rajiv Krishnan, renowned monetary economist and visiting fellow at the National Institute of Public Finance and Policy, said the unanimous vote signals policy clarity. “A unanimous decision with a neutral stance suggests the MPC is aligned in its macroeconomic assessment. They see growth holding up and inflation benign. But they are also signalling that they are not entering a prolonged rate-cut cycle. This keeps expectations anchored and prevents markets from pricing in overly aggressive easing,” he noted.
The currency market remains an unspoken area of concern. The rupee’s fall to a fresh low reflects global risk aversion as well as strong US economic data. A rate cut widens the interest rate gap between India and advanced economies, potentially triggering capital outflows.
According to Rajeev Bhatia, forex strategist at GlobalVista Partners, the RBI is acutely aware of the limits within which it must operate. “The RBI knows it is walking a tightrope. A weaker rupee feeds into imported inflation, especially energy. Their comfort today stems from low crude prices and stable supply chains. But if the Federal Reserve delays its own rate cuts, it will put pressure on emerging market currencies, including India’s,” he said. Bhatia expects the RBI to step in periodically to smooth volatility, noting that India’s foreign exchange reserves remain sufficiently strong for now.
Stock markets reacted cautiously to the announcement. Rate-sensitive sectors such as banking, real estate and automobiles saw modest gains, though broader indices remained muted amid currency concerns. Bond markets were more upbeat, with yields edging lower as traders priced in a shallow easing cycle. Economists believe that today’s cut likely marks the beginning of a modest, rather than aggressive, rate-reduction phase.
Looking ahead, the extent to which the RBI can continue reducing rates will depend heavily on inflation trends, the stability of food prices, global oil dynamics, and the direction of US monetary policy.
Any spike in food inflation due to climatic disruptions, or a sharp rise in crude oil prices, could quickly limit the central bank’s room to manoeuvre. The sustainability of India’s domestic investment revival will also play a key role in determining whether further policy support is needed.