RBI Reduces Repo Rate, Announces Steps to Stabilise Rupee, Monitors Inflation Outlook

The Reserve Bank of India's Monetary Policy Committee (MPC) announced a unanimous 25 basis points reduction in the repo rate to 5.25 per cent on December 5, 2025, marking the third consecutive cut in the ongoing easing cycle amid cooling inflation and resilient domestic growth. RBI Governor Sanjay Malhotra, unveiling the decision at the end of the three-day policy review, retained the panel's stance as 'neutral' while underscoring the need for vigilance against global uncertainties, including escalating trade tensions and commodity price swings. The move aims to bolster liquidity and support economic recovery without compromising price stability.

The MPC's optimistic outlook was reflected in an upward revision of the real GDP growth projection for FY26 to 7.3 percent, from the previous estimate of 6.8 percent, driven by robust consumption, investment inflows, and favourable agricultural prospects despite uneven monsoon impacts. This adjustment positions India as a standout performer among emerging economies, even as global headwinds like supply chain disruptions and geopolitical risks loom large. Malhotra highlighted the domestic economy's inherent strengths, including strong tax collections and private sector capex revival, as key anchors for sustained expansion.

On the inflation front, the RBI slashed its CPI projection for FY26 to 2.0 per cent from 2.6 per cent, signalling sharper disinflation than anticipated across food, fuel, and core components. Quarterly forecasts include 0.6 percent for Q3 FY26 and 2.9 percent for Q4, rising to 3.9 percent in Q1 FY27 and 4.0 percent in Q2 FY27, keeping the trajectory well-aligned with the 4 percent medium-term target. The central bank attributed this benign trend to softening global oil prices and domestic supply-chain efficiencies, though it cautioned against potential upside risks from weather anomalies or imported inflation.

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To address rupee volatility, exacerbated by the currency's recent breach beyond 90 against the US dollar, the RBI introduced a $5 billion three-year dollar-rupee buy/sell swap facility alongside Rs 1 lakh crore in open market operations for government bond purchases. These measures are designed to inject forex liquidity and stabilise reserves without depleting intervention tools, providing a buffer against external shocks while maintaining market confidence.

In a bid to enhance financial inclusion and consumer protection, the RBI will roll out a two-month nationwide campaign starting January 1, 2026, focused on streamlining grievance redressal in banking and digital payment services. This initiative, coupled with tighter oversight on cyber risks, aims to build trust amid surging retail participation in capital markets and fintech ecosystems.

Governor Malhotra's address emphasised data-dependent future actions, with the MPC poised to calibrate policy based on evolving domestic and global cues to ensure inclusive growth. The announcement triggered positive market reactions, with equity indices climbing and bond yields dipping, underscoring investor relief over the balanced yet supportive monetary framework.

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