The repo rate is the interest rate at which the RBI lends money to commercial banks for short-term needs. The decision to cut the repo rate by 25 basis points from 5.5 per cent to 5.25per cent was taken unanimously after a three-day meeting of the Monetary Policy Committee (MPC) of the RBI. Consequently, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) stands adjusted to 5.00 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.50 per cent.
SDF is a liquidity management tool that allows commercial banks to park their surplus funds with the central bank. The MPC also decided to continue with the neutral stance. In view of the evolving liquidity conditions and the outlook, the Reserve Bank has decided to conduct OMO (open market operation) purchases of government securities of Rs 1,00,000 crore and a 3-year USD/INR Buy Sell swap of USD 5 billion this month to inject durable liquidity into the system.
The MPC had earlier reduced the key lending rate in June from 6per cent to 5.5per cent. “Since the October policy, the Indian economy has witnessed rapid disinflation, with inflation coming down to an unprecedentedly low level. For the first time since the adoption of flexible inflation targeting (FIT), average headline inflation for a quarter, at 1.7 per cent in Q2:2025-26, breached the lower tolerance threshold (2 per cent) of the inflation target (4 per cent). It dipped further to a mere 0.3 per cent in October 2025. On the other hand, real GDP growth accelerated to 8.2 per cent in Q2, buoyed by strong spending during the festive season, which was further facilitated by the rationalisation of the goods and services tax (GST) rates. Inflation at a benign 2.2 per cent and growth at 8.0 per cent in H1:2025-26 present a rare goldilocks period,” said a release from the RBI.
The RBI expects retail inflation to be softer than its earlier projection, with underlying inflation pressures being lower than the headline estimates. Consumer Price Index (CPI) inflation, or retail inflation, has been projected downwards at 2 per cent for FY2025-26. For the first quarter of FY2026-27, the inflation is projected at 3.9 per cent, lower than its previous estimate of 4.5 per cent, with a rise in precious metal prices expected to add to the headline CPI. The risks to inflation forecasts are evenly balanced, said RBI Governor Sanjay Malhotra.
The RBI has also sharply raised the Gross Domestic Product (GDP) forecast for the current financial year to 7.3 per cent from its earlier estimate of 6.8 per cent. The GDP forecast for the current quarter (Q3, October-December) is also higher at 6.7 per cent than the earlier 6.4 per cent. Last quarter recorded a six-quarter high GDP growth at 8.2 per cent. “The growth-inflation balance continues to provide policy space,” said Malhotra.
Reactions from Industry Leaders:
Ajay Kumar Srivastava, Managing Director and CEO, Indian Overseas Bank, said, “We welcome the RBI’s decision to reduce the repo rate by 25 basis points to 5.25 per cent while maintaining a neutral stance. This policy supports growth while keeping inflation at or below the 4 per cent target, with real GDP expected at 7.3 per cent for 2025-26 (Q3 at 7.0 per cent; Q4 at 6.5 per cent; Q1 2026-27 at 6.7 per cent and Q2 at 6.8 per cent). The rate cut is expected to ease borrowing costs, spur demand in housing and real estate, support MSMEs and sustain personal and auto loan growth.
On the financial sector side, bank credit growth remains healthy at 11 per cent, and overall credit from bank and non-bank sources has risen by 13.1 per cent. The RBI’s Rs 1 lakh crore OMO purchases, along with the 3-year USD/INR buy-sell swap, will support liquidity and monetary transmission. These measures will encourage domestic investment and deepen financial access. Ajay Kumar Srivastava added.
We appreciate the RBI’s two-month drive beginning January 1 to address pending Ombudsman complaints, which will further strengthen customer service across the banking system. At Indian Overseas Bank, we remain committed to passing on policy benefits swiftly to customers and supporting inclusive national growth,” he noted.
Binod Kumar, MD & CEO, Indian Bank, said, “The MPC 25 bps rate cut came after careful deliberation in the backdrop of easing inflation and strong Q2 GDP growth. It will further bolster domestic demand against a weakening rupee. OMO purchase and 3 3-year buy/sell swap of dollars will further improve liquidity in the banking system. Retail customers and MSMEs can expect more affordable credit and greater confidence to plan ahead.
Niraj Kumar, Chief Investment Officer, Generali Central Life Insurance, said, ‘The Monetary Policy Committee’s decision to cut the policy rates by 25 bps and inject liquidity through OMOs and FX swaps underscores a proactive and calibrated approach. By leveraging multi-decade low inflation and GDP growth above 7 per cent, this policy strengthens confidence in India’s macroeconomic resilience, supports sovereign bond demand and provides a strong anchor for domestic markets amid global uncertainties.
Rajan Luthra, CFO, Action Construction Equipment, said, “The RBI’s decision to reduce the repo rate by 25 basis points to 5.25 per cent is a timely and positive move for capital-intensive sectors like construction equipment. A lower interest rate ecosystem eases borrowing costs, improves liquidity, and supports better planning and execution of large infrastructure projects. Despite a relatively subdued year for the industry, the government’s sustained focus on infrastructure and policy continuity continues to inspire confidence. This rate cut will further strengthen investment sentiment and operational efficiency across the sector. At ACE, we remain optimistic about 2026 and see this as an opportunity to deepen customer engagement, drive innovation, and contribute meaningfully to the next wave of India’s infrastructure growth,” he said.
Ashwani Dhanawat, Executive Director & Chief Investment Officer, Shriram General Insurance, said, “The Reserve Bank of India’s Monetary Policy Committee (MPC), under Governor Sanjay Malhotra, has concluded its December 2025 review with a measured yet anticipated step forward. In line with market expectations, the repo rate has been reduced by 25 basis points to 5.25 per cent, marking the fourth cut in the easing cycle this year (totalling 125 bps). This adjustment reflects the MPC’s confidence in sustained disinflation while maintaining a neutral policy stance to support robust economic momentum.”
Vinod Francis, GM & CFO, South Indian Bank, said, “The RBI’s decision to trim the repo rate by 25 basis points while maintaining a neutral stance signals a calibrated shift towards supporting growth, without sending an overly aggressive easing signal to the markets. RBI’s communication is straightforward that the apex will do whatever it takes to support growth given the deflationary trend in the price gauge.” “By combining a modest rate cut with a neutral stance, the MPC has tried to balance softening inflation with still-resilient growth. This, in my view, is necessitated by the weakening Rupee and narrowing interest rate spread between the Indian and the US markets.”
Shilpa Bhatter, Chief Financial Officer, UGRO Capital, said, “The RBI’s 25 bps rate cut to 5.25 per cent and the sharply revised inflation outlook create a supportive environment for credit expansion. With headline CPI now projected at just 2 per cent for FY26 and core inflation continuing to ease, the policy clearly signals confidence in domestic price stability. The liquidity measures through OMOs and the USD/INR swap will further soften funding conditions, which is positive for NBFCs and will enhance the flow of credit to MSMEs. The neutral stance gives the RBI flexibility to respond to incoming data while sustaining the growth momentum. Overall, this policy reinforces a healthy credit environment and strengthens the demand outlook across key MSME segments we serve.”
