The MPC Reduced The Repo Rate To 5.25% And Maintained A "Neutral" Stance......

 In its latest monetary policy review on December 5, 2025, the Reserve Bank of India (RBI) delivered a significant policy shift by cutting the benchmark repo rate by 25 basis points (bps) to 5.25%. This move was a response to a "rare Goldilocks period" for the Indian economy, characterized by surprisingly strong growth momentum and rapidly easing inflation, which provided the necessary policy space for an accommodative action. The decision, reached unanimously by the Monetary Policy Committee (MPC), aims to stimulate credit demand and reinforce the domestic growth trajectory amid a volatile global economic landscape.

RBI Commentary on Rate Cut and Economic Prospects

RBI Governor Sanjay Malhotra highlighted that the current economic environment supports a pro-growth, pro-liquidity policy. The key highlights of the commentary are:

Repo Rate Cut and Stance: The MPC reduced the repo rate to 5.25% and maintained a "neutral" stance. This neutral stance indicates the central bank's flexibility to adjust rates in either direction based on future data, though the current action is decidedly aimed at boosting consumption and investment.

Strong Growth Projections: The RBI substantially upgraded its real GDP growth forecast for FY2025-26 to 7.3%, a significant increase from its previous 6.8% projection. This optimism is underpinned by strong Q2 GDP growth of 8.2%, resilient domestic demand, healthy agricultural prospects, and the positive effects of GST rationalization.

Benign Inflation Outlook: The central bank lowered its CPI inflation forecast for FY2025-26 to a low of 2%, down from the 2.6% projected earlier. This downward revision reflects a "faster-than-anticipated decline" in price pressures, particularly in food prices, which fell contrary to seasonal trends in September and October.

Liquidity Measures: To ensure effective transmission of the rate cut and maintain orderly financial conditions, the RBI announced additional liquidity support measures, including Open Market Operation (OMO) purchases of government securities worth ₹1 lakh crore and a three-year dollar-rupee swap of $5 billion.

Impact on Supply and Price Expectations

The RBI's policy decisions are expected to have a significant effect on supply and price dynamics in the Indian economy:

Price Expectations (Inflation)

Moderated Price Pressures: The rate cut is a signal of the RBI's confidence that inflation will remain within its target band of 2-4% for the foreseeable future. The Governor noted that the decline in inflation has become "more generalised," with core inflation also moderating to 2.6% in October.

Anchored Expectations: By proactively cutting rates when inflation is low, the RBI aims to keep future price expectations anchored at a benign level. The forecasts suggest that inflation will remain below 4% in the first half of FY2026-27.

Supply Expectations

Increased Credit Flow: A lower repo rate reduces the cost of funds for banks, encouraging them to offer cheaper loans for households (home, auto, personal) and businesses (working capital, investment). This is expected to spur credit growth and boost overall consumption and private investment, thereby stimulating economic activity.

Support for Key Sectors: Sectors like real estate and MSMEs are expected to benefit significantly from lower borrowing costs, which can encourage new projects and job creation, supporting a virtuous cycle of growth and supply.

Optimistic Supply Prospects: The commentary mentioned improved food supply prospects due to higher kharif production and healthy rabi sowing, which are expected to keep food price volatility in check and aid overall supply stability.

The RBI's decision to cut the repo rate to 5.25% in December 2025 is a strategic, growth-oriented move, leveraging the available policy space created by a sustained period of low inflation and robust GDP performance. The commentary projects a positive wider economic outlook, with higher growth and lower inflation forecasts. By making credit cheaper and ensuring ample liquidity, the RBI aims to bolster demand, stimulate investment, and reinforce the supply chains, thereby sustaining the current "goldilocks" economic phase into the next fiscal year, despite potential global headwinds. The full impact, however, will depend on the swift transmission of these rate cuts by commercial banks to end-borrowers.