Summary of this article
RBI MPC 2025 cuts repo rate after inflation drop
GDP growth outlook stays strong, supporting neutral policy stance
Home loan EMI reduction expected after latest repo cut
Reserve Bank of India (RBI) Governor Sanjay Malhotra has announced reduction of the policy repo rate by 25 basis points (bps) to 5.25 per cent in its December 2025 monetary policy committee (MPC) meeting. All six MPC members, unanimously, have voted for the cut after reviewing the sharp fall in inflation and firm domestic growth. The standing deposit facility rate is 5 per cent, while marginal standing facility rate and the bank rate stand at 5.50 per cent. The stance remains neutral.
Inflation Drops to Multi-Year Low
Malhotra said the economy has entered a rare Goldilocks phase. “Inflation at a benign 2.20 per cent and growth at 8 per cent for the first half of this year presents a rare Goldilocks period,” he said. Average headline inflation slipped to 1.70 per cent in Q2, breaching the lower tolerance limit for the first time under the flexible inflation targeting framework. It fell further to 0.30 per cent in October. Nearly 80 per cent of the consumer price index (CPI) basket recorded less than 4 per cent inflation in October, compared to about 60 per cent a year earlier.
Food prices had a sharp, unusual correction in September and October, registering a deflation of 3.70 per cent. Vegetables fell 27.60 per cent, cereals 16.20 per cent and spices 3.30 per cent. Core inflation, excluding gold, moderated to 2.60 per cent in October. RBI has projected inflation at 2 per cent for 2025-26, with 0.60 per cent in Q3 and 2.90 per cent in Q4.
Growth Momentum Supports Policy Space
Real gross domestic product (GDP) rose 8.20 per cent in Q2, the highest in six quarters, supported by festival spending, Goods and Services Tax (GST) rationalisation, and softer crude oil prices. Gross value added (GVA) grew 8.10 per cent, with broad support from industry and services.
Rural demand strengthened as MGNREGA demand fell 33.40 per cent in October and November, indicating better farm employment. Private consumption grew 7.90 per cent in Q2, and fixed investment remained steady at 7.30 per cent. RBI has projected GDP growth at 7.30 per cent for 2025-26, 7 per cent for Q3, and 6.50 per cent for Q4.
Liquidity and Transmission Conditions Improve
System liquidity has remained in surplus, averaging Rs 1.50 lakh crore since October 2025. Money market rates have also remained aligned with the policy rate. Since the rate cuts by RBI this year, banks have reduced lending rates on fresh rupee loans by 69 basis points (bps) and on outstanding loans by 63 bps. Deposit rates too have softened. To further support durable liquidity, the RBI will purchase Rs 1 lakh crore through open market operations and inject a three-year dollar/rupee swap of $5 billion this month.
Impact on Borrowers
Rajat Bokolia, CEO, Newstone, said, “With the repo rate reduction by 25 bps, the new rate stands at 5.25 per cent. The rate cut will improve the situation of homebuyers as there will be a moderation in interest rates on home loans, making housing an accessible option. Refinancing the existing home loans will be easier as the equated monthly instalments (EMIs) on loans will also reduce.”
