MPC Cuts Repo Rate by 25 bps; RBI Raises FY26 GDP Growth Forecast to 7.3%

The Reserve Bank of India’s Monetary Policy Committee (MPC) announced a 25 basis-point cut in the repo rate, bringing it down to 5.25% effective immediately. The decision was taken unanimously during the policy meeting held on December 5, 2025.

Why the RBI Cut the Repo Rate

The rate reduction comes as India witnesses two major economic trends:
1. Real GDP growth surged to 8.2% in Q2, reflecting strong economic momentum.
2. Headline inflation dropped sharply to 1.7%, slipping below the RBI’s lower tolerance band of 2% for the first time under the flexible inflation targeting framework.

Since Governor Sanjay Malhotra took office in December 2024, the MPC has now delivered 125 basis points of cumulative cuts over four policy meetings.

Lower repo rates are expected to help reduce borrowing costs, benefiting retail borrowers, corporates, and the wider financial system.

Revised Policy Rates

With the latest cut, the following rates stand adjusted:
1. Standing Deposit Facility (SDF): 5%
2. Marginal Standing Facility (MSF) & Bank Rate: 5.50%

The MPC also retained a neutral stance, indicating that future rate movements will depend on incoming growth and inflation data.

Governor Malhotra’s Explanation: Why the Cut Was Necessary

In his statement, Governor Malhotra highlighted that:

“ Headline inflation has moderated significantly and is likely to remain softer than earlier estimates, mainly due to exceptionally benign food prices.”

He added that underlying inflation pressures remain subdued, even after accounting for the rise in precious metal prices, which contributed around 50 bps.

On growth, he said that although momentum remains strong, some moderation may be visible. The favourable inflation outlook gives the central bank policy space to support economic expansion.

Growth Outlook Strengthened

The RBI raised its FY26 real GDP growth projection to 7.3%, up from the earlier 6.8%. The quarterly forecasts are:
1. Q3 FY26: 7%
2. Q4 FY26: 6.5%
3. Q1 FY27: 6.7%
4. Q2 FY27: 6.8%

The central bank said risks to growth remain evenly balanced.

Economic activity in the first half of the fiscal year benefited from:
1. Income Tax and GST rationalisation
2. Softer crude oil prices
3. Front-loaded government capital expenditure
4. Supportive financial conditions and low inflation

High-frequency indicators for Q3 show resilience, though early signs of weakness appear in some sectors.

CPI Inflation Forecast Reduced

The RBI also sharply revised its CPI inflation forecast for FY26 to 2%, 60 basis points lower than the earlier estimate. The updated quarterly projections are:
1. Q3 FY26: 0.6%
2. Q4 FY26: 2.9%
3. Q1 FY27: 3.9%
4. Q2 FY27: 4%

A “Goldilocks” Phase for the Indian Economy

Governor Malhotra described the current environment as a rare Goldilocks period, where inflation is extremely low and growth remains high.

1. Average inflation in Q2 FY26 fell to 1.7%, breaching the RBI’s lower tolerance limit.
2. October 2025 inflation dropped further to 0.3%.
3. At the same time, GDP growth touched 8.2%, boosted by festive season demand and GST rationalisation.

This combination of high growth + low inflation is considered ideal for stable expansion.

Industry Reaction

C.S. Setty, Chairman of SBI and the Indian Banks’ Association (IBA), welcomed the policy decision. He said:

“The RBI’s December 2025 policy sends a strong message that the Indian economy is on firm ground, with robust growth and comfortably low inflation.”

He added that keeping the door open for further easing can help cushion the economy against external shocks, reinforcing India’s “higher-for-longer” growth outlook driven by strong investment, credit demand, and consumption.

By LNN (Liyaans News Network)