DELHI: The Reserve Bank of India (RBI) has reduced the policy repo rate by 25 basis points to 5.25%, marking a shift toward monetary easing as inflation softens to multi-year lows. The decision was taken unanimously by the Monetary Policy Committee (MPC) at its 58th meeting held December 3-5, 2025.
Following the rate cut, the standing deposit facility (SDF) rate stands at 5.00%, while the marginal standing facility (MSF) rate and the Bank Rate have been adjusted to 5.50%. The MPC also voted to continue with the neutral stance.
Growth outlook remains strong
India’s GDP grew 8.2% in Q2 FY26, the highest in six quarters, supported by strong domestic demand, buoyant industrial and services activity, GST rationalisation measures, lower crude prices and front-loaded government spending. Investment demand remains healthy, backed by rising non-food credit and high capacity utilisation.
The RBI projects GDP growth at 7.3% for FY26, with Q3 expected at 7% and Q4 at 6.5%. Growth for Q1 and Q2 FY27 is estimated at 6.7% and 6.8%, respectively. Risks to growth are viewed as evenly balanced.
Inflation falls sharply
Headline CPI inflation dropped to a record low in October 2025, driven by a sharper-than-usual correction in food prices. Core inflation eased to 2.6% when excluding gold, indicating broad-based cooling of price pressures.
CPI inflation for FY26 is now projected at 2.0%, significantly below earlier estimates. The RBI expects inflation at 0.6% in Q3 and 2.9% in Q4, rising to 3.9% and 4.0% in Q1 and Q2 FY27 as base effects fade.
Global backdrop remains uncertain
While the global economy is performing better than expected, inflation in major advanced economies remains above target, the US dollar has strengthened, and equity markets remain volatile. Merchandise exports from India contracted sharply in October amid subdued external demand, though services exports remain resilient.