RBI Monetary Policy: RBI Cuts Repo Rate to 5.25%, Upgrades FY26 GDP Forecast to 7.3%

Indian benchmark indices inched higher on Friday, led by domestic rate-sensitive financials, after the central bank lowered the key interest rate by 25 basis points. Sensex rose to 85,558.76, up 293.44 points (+0.34 per cent) as of 11:50 AM IST, while the Nifty climbed to 26,135.90, gaining 102.15 points (+0.39 per cent). 

The Reserve Bank of India’s Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, delivered a 25-basis-point repo rate cut, bringing the benchmark interest rate down to 5.25 per cent during its fifth bi-monthly meeting of FY26 held from 3–5 December 2025. The decision was unanimous, reflecting growing confidence in the country’s macroeconomic stability, exceptionally low inflation, and resilient growth momentum. 

The policy stance remains ‘Neutral’, signalling that while the RBI is open to further easing, decisions will remain data-driven and calibrated.

A Goldilocks Moment for India: Inflation Low, Growth Strong

Governor Malhotra described the current economic backdrop as a “rare Goldilocks period”—one where inflation stays benign, and growth remains robust. Headline CPI for FY26 has been sharply revised downward to 2 per cent, from the earlier estimate of 2.6 per cent. Inflation excluding gold, silver, food, and petroleum products is at an all-time low, underscoring broad-based disinflationary trends. Retail inflation for October dipped to around 0.25 per cent, one of the lowest prints in decades. This unique mix of soft inflation and steady economic activity provided the necessary room for a rate cut, without raising concerns of macroeconomic overheating.

Strongest Highlight: GDP Outlook Revised Up Significantly

A major takeaway from the December 2025 MPC meeting was the sharp upward revision in India’s GDP growth forecast for FY26. The revised GDP projections are 7.3 per cent for FY26, up from the previous 6.8 per cent, with Q3FY26 at 7.0 per cent, Q4FY26 at 6.5 per cent, Q1FY27 at 6.7 per cent, and Q2FY27 at 6.8 per cent. This marks India’s strong positioning as one of the fastest-growing major economies in the world.

What’s Driving the Upward Revision?

Robust rural demand, aided by a better monsoon, higher agricultural output, and rising rural consumption, has provided strong tailwinds. Urban demand recovery continues through improvements in services, discretionary spending, and retail activity. A strong investment cycle is underway, as private sector capex gains momentum, non-food bank credit expands at a healthy pace, and high-capacity utilisation enhances business confidence.

Policy support in the form of government reforms, GST rationalisation, liquidity measures, and credit expansion has also boosted economic momentum. Although export growth is moderating after an initial front-loaded boost earlier in the year, it continues to support overall GDP growth.

GDP Outlook: Why 7.3 per cent Matters

The upward revision to 7.3 per cent signals that the Indian economy is moving from policy-led momentum to broad-based organic growth. This higher projection reflects stronger domestic demand, improving private investment, and resilient consumption patterns. It highlights India’s ability to sustain growth despite global economic challenges.

Implications of the Higher GDP Forecast

A stronger GDP outlook encourages broad-based corporate earnings growth across multiple sectors, improving profitability and investment sentiment. It also supports higher employment creation and income generation, strengthening domestic demand. Faster economic expansion improves India’s fiscal position through better revenue collections, helping manage deficits more effectively. 

The upgraded forecast enhances India’s global economic standing and boosts investor confidence at a time when global uncertainties remain elevated, making India a preferred investment destination.

Liquidity Measures to Support Growth

To ensure the 25-bps rate cut flows smoothly through the financial system, the RBI announced major liquidity-boosting measures aimed at improving credit transmission and stabilising markets. Large-scale Open Market Operations (OMO) purchases of Rs 1 lakh crore will reduce borrowing costs, improve liquidity for banks, and support efficient transmission of lower interest rates into loans and corporate borrowing. Additionally, a USD/INR buy-sell swap of $5 billion over three years is designed to inject durable liquidity into the system while helping stabilise rupee volatility. These measures complement the rate cut and reinforce the RBI’s pro-growth approach.

Market Reaction: Equities and Bonds Rally

Following the policy announcement, Indian benchmark indices rose, led by domestic rate-sensitive financials. The Nifty climbed 0.23 per cent to 26,093.55 and the Sensex added 0.25 per cent to 85,479.03 as of 10:47 a.m. IST. In the bond market, the 10-year yield eased from 6.51 per cent to 6.47 per cent, reflecting expectations of a softer rate environment. Rate-sensitive sectors such as banking, NBFCs, autos, and real estate attracted immediate investor interest due to improved demand outlook and lower funding costs associated with the policy easing.

Economic Outlook: Room for More Cuts?

The RBI may have room for an additional 25 bps rate cut in early 2026, given continued policy support in response to global slowdown risks, US tariffs, and benign core inflation. However, the RBI is expected to remain cautious due to persistent global uncertainties and the rupee’s vulnerability around the Rs 90 per dollar mark, which could limit aggressive easing.

Conclusion

The December 2025 monetary policy represents a decisive move toward growth-supportive easing, backed by low inflation and robust economic fundamentals. The upgraded GDP growth forecast of 7.3 per cent for FY26 stands out as the key highlight, reinforcing India’s position as one of the world’s fastest-growing and most resilient economies. With supportive liquidity measures, stable macro indicators, and strong domestic demand, India enters 2026 with enhanced economic momentum, creating new opportunities and strengthening confidence for markets, businesses, and policymakers alike.