RBI Cuts Repo Rate to 5.25%: Key Highlights from the December 2025 Monetary Policy Meeting
The Reserve Bank of India’s Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, has delivered a significant policy move by reducing the repo rate by 25 basis points to 5.25 percent. This is the fourth consecutive rate cut of 2025 and brings the total reduction for the year to 125 basis points. The decision reflects the central bank’s assessment that the current economic environment, characterised by strong growth and easing inflation, provides room for monetary accommodation.
Decision and Economic Rationale
RBI maintained a neutral policy stance while announcing the rate cut. According to the MPC, the Indian economy continues to display robust growth momentum. Recent GDP data shows stronger-than-expected expansion, supported by rising investment and resilient domestic consumption.
At the same time, inflation has moderated substantially, remaining below the RBI’s upper tolerance band for several months. With price pressures easing and growth maintaining strength, policymakers concluded that a calibrated easing of interest rates would support economic activity without risking inflationary flare-ups.
The central bank also noted external factors such as global tariff developments, currency volatility, and geopolitical conditions. However, it conveyed confidence that India’s macroeconomic fundamentals remain stable and capable of absorbing short-term shocks.
Impact on Borrowers and the Banking System
The reduction in the repo rate is expected to bring relief to borrowers across home, auto, and personal loan categories. Since the cumulative cuts throughout 2025 amount to 125 basis points, the potential reduction in EMIs could be substantial depending on how quickly banks transmit the lower rates to customers.
RBI indicated plans to inject additional liquidity through open-market operations to ensure banks have adequate funds available for lending. This move signals the central bank’s intent not only to ease borrowing costs but also to ensure that the banking system has enough liquidity to support credit growth.
While loan rates are expected to come down, the actual benefit for customers will depend on individual banks’ policies and the speed of rate transmission.
Market Reaction
Equity markets responded positively to the MPC decision. The Sensex rose by over 400 points and the Nifty 50 recorded similar gains on the day of the policy announcement. Bank, real estate, auto, and financial services stocks led the rally, reflecting investor optimism that lower interest rates will bolster corporate earnings and stimulate demand.
The market reaction also underscored confidence in the RBI’s economic assessment. Investors welcomed the balance between supporting growth and maintaining vigilance on inflation and currency stability.
Revised Forecasts and Economic Outlook
The MPC raised India’s GDP growth forecast for the upcoming fiscal year, citing strong domestic demand, improving manufacturing activity, and rising capital expenditure. Inflation projections were lowered, with the committee noting continued moderation in food and core inflation.
The central bank emphasised that further policy action will depend on incoming data. Future decisions will consider inflation trends, global financial conditions, and the performance of the rupee. Governor Malhotra also stated that while the rupee has seen periods of volatility, it is expected to remain stable.
What to Watch Going Forward
Several key factors will determine how the economy responds to the latest policy moves:
- The pace at which banks pass on lower rates to borrowers
- Credit growth in housing, small business, and corporate lending
- Inflation patterns, especially in food prices
- Global economic developments and their impact on exports and currency
- Corporate investment trends in response to easier credit conditions
The MPC has indicated that it will continue to monitor these elements closely before taking further policy steps.
Conclusion
The December 2025 monetary policy decision reflects a deliberate effort by the RBI to strengthen economic momentum while maintaining price stability. With inflation moderating and growth remaining robust, the rate cut aims to stimulate spending, ease borrowing costs, and support the broader financial system.
For households and businesses, lower interest rates and improved liquidity conditions may provide timely support. For markets and industry, the move reinforces confidence in India’s economic trajectory as it enters 2026.