REPO RATE CUT BY RBI from Vajirao & Reddy Institute

REPO RATE CUT BY RBI

• The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points (bps), reducing it from 5.50% to 5.25%.
• This decision was taken by the Monetary Policy Committee (MPC) in its December 2025 policy meeting.
• The RBI Governor described the current situation as a “rare Goldilocks period”, where economic growth is strong and inflation is low and stable.
• This move is expected to reduce loan interest rates, lower EMIs, and support economic growth.

• The repo rate is the interest rate at which RBI lends money to commercial banks.
• When the repo rate is cut:
  • Banks can borrow at a lower cost.
  • Lending rates usually come down.
  • Loans become cheaper for consumers and businesses.
• Therefore, a repo rate cut is a growth-supporting monetary policy tool.

• The Monetary Policy Committee (MPC) is the body responsible for deciding India’s monetary policy, especially interest rates.
• It was established under the RBI Act, 1934, through an amendment in 2016.

• The committee has six members.
• Three members are from the RBI:
  • The RBI Governor (Chairperson)
  • One Deputy Governor
  • One RBI official nominated by the Central Board of the RBI
• Three members are external experts appointed by the Central Government.

• Each member has one vote.
• Decisions are taken by majority voting.
• In case of a tie, the RBI Governor has a casting vote.

• To maintain price stability, meaning control inflation.
• To support economic growth, without allowing inflation to rise uncontrollably.
• To achieve the inflation target of 4% ± 2% under the inflation targeting framework.

• The repo rate was cut by 25 bps to 5.25%.
• This decision was taken unanimously by the MPC.
• This was the first repo rate cut after two consecutive policy pauses.
• The previous rate cut took place in June 2025, when the repo rate was reduced by 50 bps.
• Total repo rate cut in FY 2025–26 so far: 100 bps (from 6.25% to 5.25%)

• India’s economy performed better than expected.
• The RBI increased its GDP growth projection for FY26.

• Inflation has continued to decline steadily.
• The inflation outlook is now considered benign and well-anchored.

• EMIs are expected to fall on:
  • Home loans
  • Vehicle loans
  • Personal loans
  • Corporate loans
  • MSME and small business loans
• Lower borrowing costs are expected to:
  • Boost consumption.
  • Encourage private investment.
• Overall, the move supports a growth-friendly environment.

• The Indian rupee breached the psychological 90-mark against the US dollar.
• RBI Governor stated that:
  • RBI does not target any specific exchange rate level.
  • Currency value is determined by market forces.

• RBI intervenes only to prevent excessive or abnormal volatility, not to fix a rate.
• The rupee closed at ?89.95 per dollar, compared to ?89.89 the previous day.

• The Governor stated that there has been no change in RBI’s tolerance to volatility.
• RBI continues to follow a market-determined exchange rate regime.

• To ensure adequate liquidity in the financial system, RBI announced:

• Purchase of government securities worth ?1 lakh crore.

• Three-year swap worth USD 5 billion.
• Aimed at injecting durable liquidity.