Key Points
- RBI MPC ended on 5 December 2025, repo rate cut by 0.25% to 5.25%
- Total repo reduction in 2025 now 1 percentage point, from 6.25% to 5.25%
- RBI sees inflation easing to 2.6% in FY 2025-26, with stable prices after 2026
- GDP growth robust, Q2 FY26 growth at 8.2%, fastest in six quarters
- Home, auto and business loan EMIs expected to come down as banks reprice rates
- Real estate sector welcomes move, MSMEs say benefits depend on banks passing on cuts
- Equity markets stay range bound around policy, rate sensitive sectors see mild gains
The Reserve Bank of India, after its three-day Monetary Policy Committee meeting from 3 to 5 December, announced a 0.25% reduction in the policy repo rate. Governor Sanjay Malhotra said the repo rate now stands at 5.25%, compared to 5.5% earlier, adding that this is the second cut of the year after a larger reduction from 6.25% to 5.5%.
The MPC kept its focus on supporting growth while ensuring that inflation stays within the target band. The policy stance remains geared towards gradually normalising interest rates, with the Governor emphasising that future moves will depend on incoming data on prices, growth and global financial conditions.
Inflation And Growth Outlook
According to the latest projections, RBI now expects headline inflation to moderate to around 2.6% in FY 2025-26, sharply lower than the earlier estimate of 4.2% given in February. Inflation is projected to hover close to 4% in the last quarter of 2026, suggesting a period of relative price stability for households and businesses.
On the growth front, the central bank highlighted that India’s GDP expanded by 8.2% in the second quarter of FY26, the fastest pace in about a year and a half. Strong manufacturing activity, steady services growth and better-than-expected urban consumption have all contributed to this momentum, giving the MPC room to support demand through a modest rate cut.
What The Repo Cut Means For Borrowers
A reduction in the repo rate lowers the cost at which banks borrow short term funds from the RBI, which over time reduces the benchmark lending rates linked to the policy rate. For borrowers, this typically translates into lower EMIs on home, auto and business loans, especially for loans that are directly linked to external benchmarks such as the repo rate.
Banks are expected to start revising their lending rates over the coming weeks, with new borrowers likely to see lower interest offers first, followed by a gradual reset for existing floating-rate customers as their reset dates arrive. Real estate developers have welcomed the decision, saying that softer rates can revive housing demand, improve affordability for first-time buyers and support ongoing projects.
Impact On MSMEs, Depositors And Liquidity
While industry bodies are optimistic about cheaper credit, many micro, small and medium enterprises argue that the real gain will depend on how quickly and fully banks transmit the rate cut. They point out that in past cycles, lending rates did not always fall in line with the policy rate, while various charges and margins remained high for smaller borrowers.
For depositors, the move could eventually lead to some moderation in fixed deposit rates, though banks often adjust lending rates faster than deposit rates. At the system level, easier monetary conditions are expected to keep liquidity comfortable, support credit growth in sectors like housing, automobiles and services, and help businesses manage working capital costs more efficiently.
Stock Market Reaction And Sectoral Moves
Ahead of the policy announcement, benchmark indices traded in a narrow range as investors waited for clear signals from the RBI. After the decision, rate-sensitive pockets such as banking, realty and auto stocks saw mild buying interest, reflecting expectations of better credit demand and improved sales in the coming quarters.
The Nifty IT and Realty indices posted small gains, supported by hopes of stronger domestic consumption and investment, while Media and Healthcare indices remained under pressure. Overall, the market’s flat closing suggests that investors broadly anticipated a small rate cut and are now watching for clues on the RBI’s next steps and the pace of transmission by banks.
