The Reserve Bank of India (RBI) has reduced the policy repo rate to 5.25 per cent after a unanimous vote by the Monetary Policy Committee during its meeting held from December 3 to 5. The Standing Deposit Facility rate now stands at 5.00 per cent and the Marginal Standing Facility rate has moved to 5.50 per cent. The policy stance remains neutral. The decision reflects the central bank’s reading of a softer inflation environment and steady domestic momentum.
The RBI noted that global uncertainty has eased since the end of the United States government shutdown. Trade negotiations have also moved forward. Despite this improvement, the world economy continues to show uneven inflation trends. Equity markets remain unsettled as investors reassess the direction of monetary policy in major economies. The US dollar has strengthened due to safe-haven demand while Treasury yields have remained in a narrow range.
In India, the economy expanded strongly in the second quarter of 2025–26 with GDP growth of 8.2 per cent, the highest in six quarters. Rural demand has stayed firm due to healthy kharif output and better rabi sowing. Urban demand has risen at a steady pace supported by GST rationalisation and festival spending. High-frequency data suggests that overall activity remains stable although a few early indicators show mild signs of moderation.
Investment activity has continued to improve as capacity utilisation rises and non-food bank credit expands. Private investment has gained strength as well. Exports remain a concern. Merchandise exports fell sharply in October due to weak global demand and services exports softened too. The RBI said that external conditions pose risks even though ongoing trade and investment discussions may offer some support in the months ahead.
Inflation recorded an exceptional decline in October. Headline CPI inflation dropped to its lowest level on record due to an unexpected fall in food prices. Core inflation, which excludes food and fuel, eased to 2.6 per cent. The RBI now projects inflation for 2025–26 at 2.0 per cent, much lower than earlier estimates. The central bank also pointed out that underlying pressures are even weaker once the impact of higher precious metal prices is removed.
The central bank expects growth to remain favourable. Strong agricultural prospects, benign inflation, and healthier balance sheets in both the corporate and financial sectors are likely to support domestic activity. Real GDP growth for 2025–26 is projected at 7.3 per cent. Some easing of momentum is expected in the later quarters but the overall outlook remains positive.
Given the combination of very low inflation and steady growth, the MPC decided that a rate cut was appropriate. All members voted in favour of reducing the repo rate. One member, Prof. Ram Singh, suggested that the stance should shift from neutral to accommodative although the majority supported maintaining the current position. The next policy meeting will take place in early February.
Source: Reserve Bank of India, Monetary Policy Statement and Press Release, December 5, 2025
