Repo Rate Reduced as India Enters Goldilocks Phase

Introduction

The Reserve Bank of India’s Monetary Policy Committee (MPC) announced a significant policy shift on December 5, 2025, unanimously reducing the repo rate by 25 basis points to 5.25%. This decision comes into effect immediately and reflects the central bank’s response to an extraordinary combination of strong economic growth and exceptionally low inflation.

Why the Rate Cut Was Announced

Surge in Economic Growth

Recent data reveals that India’s real Gross Domestic Product (GDP) expanded by an impressive 8.2% during the second quarter of the fiscal year, highlighting the economy’s sustained momentum.

Sharp Fall in Inflation

At the same time, headline inflation averaged just 1.7%, dipping below the RBI’s lower tolerance limit of 2% for the first time since India adopted the flexible inflation-targeting framework. This disinflationary trend has offered the MPC enough room to support economic activity through monetary easing.

Cumulative Policy Easing Under Governor Sanjay Malhotra

Since assuming office on December 11, 2024, Governor Sanjay Malhotra has overseen four rate cuts totaling 125 basis points. The latest reduction continues the RBI’s approach of responding proactively to evolving macroeconomic conditions. With the repo rate now at 5.25%, borrowing costs are expected to fall further, offering relief to households, businesses, and savers alike.

Adjustment of Key Policy Rates

Following the repo rate cut, the Standing Deposit Facility (SDF) rate has been revised to 5%, while the Marginal Standing Facility (MSF) rate and the Bank Rate now stand at 5.50%. The MPC has maintained a neutral stance, suggesting that policy adjustments—upward or downward—remain possible depending on future economic developments.

Governor’s Insights on the Policy Decision

Governor Malhotra emphasized that the decline in inflation has been sharper than anticipated, largely due to exceptionally low food prices. He noted that even underlying inflation remains subdued, despite a 50-basis-point impact from rising precious metal prices. Although growth is still resilient, the RBI expects a modest softening ahead. The combination of strong growth and benign inflation, he said, provides adequate policy space to further support the economy.

Drivers of Economic Performance

According to the Governor, the economy benefited in the first half of the fiscal year from tax rationalisation in Income Tax and GST, lower crude oil prices, increased government capital expenditure, and favorable monetary conditions. While high-frequency data shows continued robustness in the third quarter, certain leading indicators are starting to hint at mild weakness.

Updated Economic Projections

GDP Growth Outlook

The RBI has upgraded the real GDP growth forecast for 2025–26 to 7.3%, an increase of 0.5 percentage points:
• Q3: 7% • Q4: 6.5% • Q1 2026–27: 6.7% • Q2 2026–27: 6.8%
Risks to the outlook remain evenly balanced.

Inflation Outlook

Consumer Price Index (CPI) inflation has been revised downward to 2% for 2025–26:
• Q3: 0.6% • Q4: 2.9% • Q1 2026–27: 3.9% • Q2 2026–27: 4%

A Rare Goldilocks Phase for India

The Governor described the current economic environment as a “rare goldilocks period,” marked by low inflation and strong growth. Inflation touched an unprecedented 0.3% in October 2025, while GDP growth reached 8.2% in Q2, buoyed by festive demand and GST rate rationalisation. With inflation at 2.2% and growth at 8% in the first half of the fiscal year, India finds itself in an exceptionally favorable macroeconomic position.

Industry Reactions

C.S. Setty, Chairman of SBI and the Indian Banks’ Association, hailed the policy as a strong signal of confidence in India’s economic trajectory. He highlighted that the upward revision in GDP projections—from 6.8% to 7.3%—underscores the RBI’s optimism. He added that the rate cut, combined with the central bank’s openness to future easing, provides a buffer against external shocks while reinforcing India’s long-term growth momentum in investment, credit, and consumption.

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Sorit Chaudhary

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