RBI Cuts Repo Rate to 5.25% to Boost Economic Growth Amid Low Inflation

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.

This reduction brings the total rate cuts for the year to 125 basis points, following previous cuts in February, April, and June. The move aims to support economic growth amid a favorable inflation outlook and global economic challenges.

India's economy has been experiencing a "rare goldilocks" phase, characterized by strong growth and low inflation. In the second quarter of FY26, the GDP growth rate was 8.2%, the highest in six quarters, supported by strong domestic demand and buoyant industrial and services activity. Retail inflation reached a record low of 0.25% in October 2025, providing the RBI with the flexibility to support economic growth through monetary easing.

In addition to the rate cut, the RBI announced measures to inject liquidity into the banking system:

• Open Market Operations (OMO): The RBI plans to purchase government securities worth ₹1 trillion (approximately $11.14 billion) on December 11 and 18, 2025.

• Foreign Exchange Swap: A $5 billion three-year dollar-rupee foreign exchange swap is scheduled for December 16, 2025.

These measures aim to bolster liquidity, support the bond market, and stabilize the currency amid global challenges, including U.S.-imposed tariffs.

Following the announcement, the Indian rupee weakened, dropping from 89.78 to 89.92 against the U.S. dollar. For the year, the rupee has depreciated by 5%, making it the worst-performing currency in Asia. The depreciation has been driven by weak trade and capital flows, along with heightened U.S. trade tariffs.

RBI Governor Sanjay Malhotra emphasized the resilience of the Indian economy despite global uncertainties. He stated, "Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience. It is poised to register high growth. The headroom provided by the inflation outlook has allowed us to remain growth supported."

Since June 2000, the RBI has made numerous changes to its key repo rate to manage liquidity and inflation. The highest rates were observed in the early 2000s, reaching up to 16%, while the lowest was 4% during the COVID-19 pandemic in 2020. The current rate cut marks the fourth reduction in the easing cycle this year, totaling 125 basis points.

The RBI's decision to cut the repo rate and implement liquidity measures reflects its proactive stance in supporting economic growth while managing inflation. These actions are expected to benefit borrowers through lower interest rates and stimulate investment, contributing to sustained economic momentum.