As Inflation eases, MPC opts for Another Rate Cut
As inflation eases MPC opts for another rate cut, this is the fourth time this year. The 58th Meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) convened from December 3 to 5, 2025. In the meeting, the MPC decided to go for another interest rate cut.
With low inflation, the economy witnessed a strong growth rate. Through more consolidation and changes in regulations, the banking system has smoothed and strengthened the financial system, which has not only protected consumers but also enhanced ease of doing business.
Monetary Policy Statement
On 5th December, 2025, the MPC delivered a significant decision after a detailed assessment of prevailing macroeconomic and financial conditions. It has unanimously reduced the key policy rate (i.e. Repo Rate) under the Liquidity Adjustment Facility by 25 basis points (bps) to 5.25%.
As a result, the Standing Deposit Facility (SDF), which now stands at 5%, the Marginal Standing Facility (MSF) rate and the Bank Rate are now adjusted to 5.50%.
As a result of 100 basis points (till December 5th), the Weighted Average Call Rate (WACR), the 3-month Treasury bill rate, the rate on 3-month commercial papers issued by non-banking financial companies (NBFCs), and the 3-month Certificate of Deposit (CD) rate have all declined by different amounts ranging from 110 to 140 basis points this year.
Rationale behind Policy decision – i.e. Repo Rate Cut
The MPC noted that inflation has declined significantly, mainly due to lower food prices. Inflation forecasts for 2025-26 and 2026-2027 are revised downwards. Core inflation, which was increasing, has eased slightly and is expected to remain stable.
Both headline and core inflation are expected to be around 4% in the first half of 2026-27. The impact of rising precious metal prices on inflation is minimal. It is expected to have a marginal slowdown, in spite of robust growth.
The rationale behind the policy decision was the growth-inflation dynamics, especially the benign inflation outlook on both headline and core, which provides the requisite policy space to support the growth momentum.
The global economy displayed mixed signals with improved performance and normalised trade activities. Uncertainty decreased post-US government shutdown resolution and progress on trade agreements. Inflation varied among major advanced economies, mostly exceeding targets. The US dollar strengthened due to safe-haven demand, while treasury yields remained steady. Equity markets were volatile due to volatile monetary policy expectations and concerns over tech stock valuations.
India’s domestic economy showed strong growth, with real GDP reaching a six-quarter high of 8.2% in Q2:2025-26. This growth was driven by robust domestic demand despite global uncertainties. Real GVA also expanded by 8.1%, supported by strong industrial and services sectors. Factors contributing to this growth included tax reforms, lower oil prices, increased government spending, and favourable monetary conditions.
In Q3, high-frequency indicators indicated strong domestic economic activity, with some early signs of weakness in leading indicators. Domestic demand was boosted by GST rationalisation and festival spending in October-November. Rural demand remained robust, while urban demand showed steady improvement.
Investment activity was healthy, driven by private investment growth, non-food bank credit expansion, and high capacity utilisation. However, merchandise exports declined in October due to weak external demand, along with a softening in services exports.
On the supply side, Agricultural growth was boosted by a strong kharif crop production, increased reservoir levels, and improved rabi crop sowing. Manufacturing activity showed positive growth, and the services sector remained stable.
Looking forward, domestic factors such as favourable agricultural prospects, the ongoing impact of GST rationalisation, low inflation, strong corporate and financial institution balance sheets, and supportive monetary and financial conditions are expected to sustain economic activity. Continued reform efforts are expected to enhance growth, while the external sector shows mixed signals with strong services exports but challenges for merchandise exports.
The MPC forecasts real GDP growth of 7.3% for 2025-26, with Q3 at 7.0% and Q4 at 6.5%. For 2026-27, growth is projected at 6.7% for Q1 and 6.8% for Q2. Risks to these projections are evenly balanced.
CPI inflation for 2025-26 is now projected at 2.0 per cent (Q3 at 0.6 per cent; Q4 at 2.9 per cent), reflecting softer overall inflation, mainly due to falling food prices.
The MPC emphasised that core inflation remains subdued, with the rise in precious metals prices expected to have a 50 basis point impact.
MPC Stance
Despite going for a rate cut, the MPC decided to maintain its neutral stance. Though it is not a unanimous decision. One of the members, Prof. Ram Singh, held the view that the stance should be changed from neutral to accommodative.
The minutes of the MPC meeting will be released on December 19, 2025, and the next meeting is scheduled for February 4 to 6, 2026.
Conclusion
Some of the economists and analysts may be surprised by this rate cut. The reason is that the RBI has opted for front-loading monetary policy this year, and therefore, they would not have expected this. However, the GST rate cuts have given relief to Inflation, hence the RBI would have decided that it’s the appropriate time for a rate cut. As Christmas, New Year, and Makara Sankranti are approaching, this would increase/boost the consumption expenditure in the economy.
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