RBI Repo Rate Cut: Balancing a weakening rupee against strong growth and softening inflation, the RBI’s Monetary Policy Committee on Friday cut the key policy rate, repo rate, by 25 basis points, paving the way for banks to lower interest rates on loans – especially home, personal and small business loans — and deposits. Buoyed by the economy’s robust performance, the panel also raised the FY2026 GDP growth forecast by 50 basis points to 7.3 per cent and trimmed the consumer price index (CPI) inflation projection to 2 per cent from 2.6 per cent. The rate-setting committee, which met in Mumbai on Friday, retained its neutral policy stance.
The six-member MPC decided to reduce the repo rate – the key policy rate – to 5.25 per cent even as the rupee fell to an all-time low of 90.43 on Thursday, casting a shadow over the policy trajectory.
The GDP forecast has been raised to 7.3 per cent for FY 2026 after the country’s GDP expanded at an impressive 8.2 per cent in the July-September 2025 quarter, up sharply from 5.6 per cent in the corresponding quarter of the previous fiscal. This followed a growth of 7.8 per cent in Q1 FY26, bringing the H1 growth to 8 per cent.
With retail inflation at an all-time low, the MPC reduced the inflation forecast to two per cent for FY2026 from 2.6 per cent set earlier. Headline CPI inflation moderated to 0.25 per cent in October 2025 from 1.4 per cent in September. This was driven by the deepening of deflation in food prices and impact of the GST rate cut on goods and services prices, amid large favourable base effects.
Unveiling the policy, RBI Governor Sanjay Malhotra said, “Indian economy continued to witness rapid disinflation this year.”
He said economic activity in the first half of the current financial year benefitted by income tax and GST rationalisation, softer crude oil prices, front loading of government capital expenditure and facilitative monetary and financial conditions supported by benign inflation. “High frequency indicators suggest that the domestic economic activity is holding up in Q3. There are some signs of weakness in a few leading indicators. GST rationalisation and festival season supported domestic demand during October and November this year,” he said. “Rural demand continues to remain robust and urban demand is recovering steadily. Investment activity remains healthy with private investment gaining steam.”
Robust GDP expansion signals that the economy is already running at a healthy pace, reducing any urgency to stimulate activity through cheaper borrowing. In fact, cutting rates during a high-growth phase can be risky, as it may push up credit demand too quickly and sow the seeds of future inflation. This has put the RBI in a delicate position: inflation offers space, but growth removes the need. In such a scenario, the central bank tends to move cautiously, waiting to see whether low inflation is durable or merely a temporary relief driven by favourable food or commodity prices.
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Why did the RBI raise GDP and reduce inflation projections?
The RBI revised FY26 inflation projection lower, and GDP forecast upwards in the policy in the wake of favourable macroeconomic conditions.
On inflation, Malhotra said decline in inflation has become more generalised. Food supply prospects have improved on the back of higher kharif production, healthy rabi sowing, adequate reservoir level and conducive soil moisture. “Barring some metal, international commodity prices are likely to moderate going further. Overall, inflation is likely to be softer than what was projected in October, mainly on account of fall in food prices,” he said.
Factors such as stable Brent crude prices, healthy reservoir levels supporting rabi sowing, and muted price pressures arising from excess capacity in China should help prevent any sharp rise in inflation. This decline in inflation has created policy space for the RBI to consider a rate cut. Inflation has remained comfortably low, even as growth momentum has picked up sharply. GDP expanded 8.2 per cent in Q2, up from 7.8 per cent in Q1 FY26. The acceleration has been driven by strong agricultural output, the lower income-tax burden announced in the previous Budget, rationalised GST rates, the impact of earlier RBI rate cuts, an early festive-season lift to consumption, and front-loaded exports. The headline growth also benefited from a favourable statistical base and an unusually low deflator during the period.
In October monetary policy, the RBI had raised the GDP growth projection by 30 bps to 6.8 per cent, from an earlier estimate of 6.5 per cent, while it had slashed inflation forecast by 50 bps to 2.6 per cent as against an estimate of 3.1 per cent.
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Impact on lending rates
With the RBI cutting the repo rate at 5.25 per cent, interest rates on loans and deposits are likely to come down. Lenders are also likely to revise their interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR). The immediate impact of a new repo rate is that all external benchmark lending rates (EBLR) linked directly to the repo will come down. This means borrowers with loans tied to the repo rate benchmark will see their equated monthly instalments (EMIs) coming down. Deposit rates will also come down, which is likely to be bad news for savers and pensioners.
Earlier this year, when the RBI cut the repo rate by a cumulative 100 basis points (bps) between February and June 2025, most banks passed on the benefit by lowering repo-linked lending rates. MCLR was also reduced, though the transmission was more gradual. However, some banks raised the home loans in the wake of pressure on margins.
Rupee depreciation impact on policy
The rate decision has come at a time when India’s currency slipped below the psychologically critical 90-per-dollar level on Wednesday, jolting financial markets and amplifying concerns about the broader macroeconomic landscape. A depreciating rupee can significantly complicate the central bank’s plans to cut interest rates. When the currency weakens, it raises concerns about imported inflation — everything from crude oil to essential commodities becomes costlier, feeding into domestic prices. Even if current inflation looks comfortable, a sliding rupee can threaten future inflation, making the Reserve Bank of India more cautious. Rate cuts in such a situation become tricky.
Persistent dollar outflows, particularly from foreign portfolio investors booking profits and reallocating to more attractive markets abroad, have steadily drained liquidity and heightened demand for the greenback. At the same time, the prolonged delay in finalising a trade deal with the US has injected uncertainty into India’s external position. Each passing week without clarity has dampened confidence and raised questions about future trade flows, tariff competitiveness, and the overall balance-of-payments outlook.
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No change in policy stance
The MPC retained the ‘neutral’ monetary policy stance. A neutral stance will mean that the rate can move in either direction, depending on the evolving economic data. The policy stance changed to neutral from accommodative in the June 2025 policy.
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