RBI Cuts Repo Rate To 5.25%, By 25 Basis Points On Back Of Strong Growth

The Reserve Bank of India (RBI) released its bi-monthly monetary policy here on Friday after the Monetary Policy Committee (MPC) concluded its three-day review process, which began on Wednesday with an RBI panel led by RBI Governor Sanjay Malhotra unanimously voting to cut the government securities (G-Secs) repurchase (repo) rate by 25 basis points (bps) to 5.25 per cent.

In simple English, a basis point (bp) is an interest rate of 0.01 per cent.

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The RBI’s move is expected to boost liquidity in the market through higher spending in interest rate-sensitive sectors like banking, real estate, and consumer durables. The RBI’s repo rate cut is expected to provide a sigh of relief to new home loan borrowers as well. A reduced repo rate would enable banks, non-banking financial companies (NBFCs), and other financial institutions to lower their lending rates by up to 25 basis points, resulting in lower monthly home loan EMIs due to a reduced interest rate.

At the press conference after the monetary policy was announced, RBI Governor Sanjay Malhotra said, “We are at neutral today. We believe, as you also alluded to and as I mentioned in my speech earlier, that inflation is very benign. Excluding volatile food prices, inflation has remained around 3 per cent to 3.5 per cent over the last two years. Going forward, too, if gold and precious metals are excluded, our expectation is that inflation will remain very benign”.

“Having reduced the policy repo rate by another 25 basis points, the key focus now is on monetary policy transmission. Since inflation is expected to remain benign, we want transmission to take effect in the real economy first. After that, we will review how inflation behaves, how the growth–inflation dynamics evolve, and take decisions policy by policy,” RBI Governor Malhotra stated.

The Rs 1 lakh crore open market operation (OMO), which is the process of purchase or sale of government bonds by the RBI in order to manage money supply, will start in December. “The move is not intended to influence the yields on government bonds,” he stated.

Significantly, the yield on the benchmark 10-year bonds fell by 5 basis points immediately after the RBI policy decision was announced.

The RBI Governor also presented an optimistic view of where inflation is headed. “The latest projection shows the consumer price index (CPI) at 4 per cent or less until September 2026. If not for the pressure from sky-high gold prices, core inflation would have been 2.6 per cent in October,” Malhotra said.

Together with the low inflation, the RBI Governor highlighted GDP growth at 8 per cent for the first half of this year, which he said presents “a rare Goldilocks period”.

The RBI has changed the interest rates it uses to manage money in the banking system. Banks can now deposit extra money with the RBI at a 5 per cent interest. Called the standing deposit facility (SDF), this was 5.25 per cent earlier. On the other hand, if banks need to borrow money from the RBI in an emergency, the rate will be at a 5.50 per cent marginal standing facility rate (MSF).

The RBI increased its FY26 GDP forecast by 50 basis points (bps) to 7.3 per cent, citing a healthy rural demand, as well as improvement in the urban areas. “Private sector activity is gaining steam,” the RBI Governor said.

The RBI stated that it expects the Indian economy to grow at a rate of 6.8 per cent in the second quarter of FY27.

“Looking ahead, domestic factors such as healthy agricultural prospects, continued impact of GST rationalisation, benign inflation, healthy balance sheets of corporates and financial institutions, and congenial monetary and financial conditions should continue to support economic activity. Continuing reform initiatives would further facilitate growth,” RBI Governor Malhotra said.

The RBI cut FY26 Consumer Price Index (CPI) inflation forecast to 2 per cent from 2.6 per cent earlier, with Q3FY26 forecast cut to 0.6 per cent from 1.8 per cent, Q4FY26 forecast cut to 2.9 per cent from 4 per cent, and Q1FY27 estimates lowered to 3.9 per cent from 4.5 per cent. RBI expects retail inflation at 4 per cent in Q2FY27.

The RBI stated that both headline as well as core inflation are expected to be at 4 per cent, or below the 4 per cent mark, until September 2026. At USD 686 billion, India currently has enough foreign exchange to cover imports for 11 months, the RBI stated.

“The Monetary Policy Committee (MPC) noted that headline inflation has eased significantly and is likely to be softer than the earlier projections, primarily on account of the exceptionally benign food prices,” the RBI Governor said.

The RBI Governor maintained that India’s current account deficit is likely to remain “modest” this year, citing a “robust” growth in gross foreign direct investment (FDI) in the first half of the current financial year. Foreign portfolio flows stood at USD 0.7 bn so far this year, primarily due to outflows from the equity segment, the RBI stated.

The RBI announced that it will conduct open market operations (OMO) purchases of Rs 1 trillion in government securities (G-Secs) and a three-year USD/INR buy-sell swap of USD 5 billion in December 2025 to inject liquidity into the system.

“We have decided to conduct open market operation (OMO) purchases of government securities amounting to Rs 1,00,000 crore and 3-year USD/INR buy-sell swaps of USD 5 billion this month (December 2025). These measures will ensure adequate, durable liquidity in the system and further facilitate monetary transmission,” the RBI Governor said.

The RBI stated that it will conduct a two-month campaign from January 2026 to address grievances pending for more than a month with the RBI Ombudsman, noting that, in recent years, due to the receipt of a large number of grievances, pending cases with the RBI Ombudsman have increased.

“We propose to hold a two-month campaign from January 1, 2026, with an aim to resolve all grievances pending for more than a month with the RBI Ombudsman. I elicit the support of all regulated entities in this endeavour,” the RBI Governor said.