RBI Cuts Repo Rate by 25 bps — A Move to Accelerate  Economic Momentum 

In its December policy review, the Reserve Bank of India‘s Monetary Policy Committee  (MPC) said that the repo rate will be lowered by 25 basis points, to 5.25%. Following  multiple rounds of discussion between December 3 and 5, which resulted in a  unanimous resolution by all six MPC members, this action was taken. Other  benchmark-linked rates have also changed as a result of the primary lending rate  modification. The Standing Deposit Facility (SDF) is now at 5.00%, and the Bank Rate  and the Marginal Standing Facility (MSF) are at 5.50%. 

Despite widespread speculation, the rate drop caused division among economists and  market observers. After retail inflation fell precipitously to 0.25% in October—the lowest  level in recent years—the majority of economists had initially anticipated such a  reduction. However, India’s better-than-expected 8.2% GDP growth in the second  quarter raised questions about the urgent need for monetary easing, leading many to  speculate that the RBI would choose to pause rather than stimulate. However, the  central bank startled everyone by cutting, indicating a deliberate balance between price  stability and growth promotion. 

How Lower Rates Accelerate an Already Strong Economy 

According to the RBI, the Indian economy is about to enter a “goldilocks zone,” a unique  stage in which GDP is growing at a robust 8% in the first half of FY25–26 while inflation  stays low at 2.2%. Governor Sanjay Malhotra emphasized that while GDP is still strong, 

several indicators point to a potential slowdown in the upcoming quarters,  necessitating the strengthening of domestic demand through accommodating  monetary policy. 

Concerning foreign concerns, the central bank also voiced caution. Uncertain trade  flows, geopolitical unrest, and worldwide volatility are still elements that could have an  immediate impact on domestic GDP. Simultaneously, India is actively involved in a  number of trade and investment agreements that could facilitate future cycles of  upward growth if they are successfully finished. As a result, the repo rate reduction has  been presented as a proactive policy to maintain economic resilience rather than a  reactionary one. 

Policy Stance and Growth Projections 

In response to this evaluation, the MPC lowered the repo rate by 25 basis points and  opted to maintain a neutral policy position, indicating flexibility to react to changing  circumstances without immediately committing to tightening or further easing. The  

committee now enjoys the policy leeway needed to promote growth without running the  risk of price instability thanks to low inflation. 

It’s interesting to note that the RBI increased the GDP growth forecast for the current  fiscal year by 50 basis points, from 6.8% to 7.3%, despite global challenges and  projections of a gradual reduction in demand. The robustness of domestic  fundamentals, stable investment sentiment across industries, and robust consumption  trends are all reflected in this improved assessment. 

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Market Reactions to RBI’s Rate Cut Decision 

According to Vijay Gour, Research Analyst at Mirae Asset Sharekhan, the MPC  unanimously decided to lower the repo rate by 25 basis points while remaining neutral,  which was reflected in the RBI’s most recent policy. Additionally, the central bank  revised its forecast for FY26, cutting CPI inflation to 2.0% from 2.6% and increasing GDP  growth to 7.3% from 6.8%, suggesting comfort with price stability. The RBI wants to buy  USD 5 billion over three years to sustain the currency and announced a ₹1 lakh crore  OMO purchase in December to relieve liquidity. Although banks may see short-term  NIM pressure as a result of lower rates, Gour claims that this move is favorable for  credit-driven industries like NBFCs, SFBs, MFIs, auto and housing finance, and gold  lenders. 

Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said the  MPC’s unanimous rate cut reflects a clear push to further strengthen growth despite  already strong momentum. He noted that the upgraded 7.3% FY26 GDP forecast is  market-positive, indicating confidence in continued expansion. However, banks may  not respond strongly as lower rates could pressure margins and make deposit  mobilisation tougher. In contrast, rate-sensitive sectors like autos and real estate are  well-positioned to gain quickly from reduced borrowing costs. 

Conclusion 

In India’s economic cycle, managed inflation has made growth-driven stimulus possible  without endangering macroeconomic stability, as demonstrated by the RBI’s December  monetary policy. The central bank’s intention to foster resilience, maintain momentum,  and bolster domestic capacity in a world of changing difficulties is reaffirmed by the 25  basis point repo drop.