The central bank has reduced its repo by 25 basis points down to 5.25% as announced this morning by the governor of the Reserve Bank of India (RBI) placing emphasis on steps to boost growth and ignoring the fears about the depreciation of the rupee.
This ruling was reached by all members of the Monetary Policy Committee(MPC) of the RBI, which convened a 3 day long meeting every two months to deliberate on the strategy to be used by the central bank since it had to weigh between inflation that was at a record low and a declining rupee that was at its lowest yesterday.
In prior expectations of an easing inflation, in June the MPC had cut the key lending rate down to 5.5% against 6%. Reduction in the repo rate is likely to translate to the cheapness of homestead and car loans among retail borrowers.
Inflation and growth by RBI
The RBI predicts that the retail inflation would also be milder and underlying inflation pressures are lower as compared to the headline estimates. Retail inflation or Consumer Price Index (CPI) is projected at 2% rounding off to FY2025-26.
The inflation rate will be reduced to 3.9 during the first quarter of FY2026-27, as compared to its earlier projection of 4.5, and the prices of precious metals will likely increase as an addition to the headline CPI. Malhotra said risks to the inflation forecasts were equal.
The RBI has also drastically increased the Gross Domestic Product (GDP) prognosis of this current financial year to 7.3 percent as opposed to the previous projection of 6.8 percent. There is also an increase in the GDP forecast of the current quarter (Q3, October-December) at 6.7%.8.
The last quarter registered 8.2 GDP growth which was the highest in six quarters.
The balance of growth and inflation still offers room to the policies, according to Malhotra.
RBI monetary policy, repo rate outlook and inflation On prices, the RBI monetary policy analysis points to the second-quarter core inflation that is soft. The central bank sees this move will keep within control assisted by reduced precious metal prices. RBI is now targeting full-year CPI inflation at 2, which is lower than the projection on October review.
The RBI is also provided with monetary policy space by growth data to manipulate the repo rate. July-September GDP had increased 8.2, which is above the expectations of many. A number of analysts have set full-year growth targets to over 7 percent in the range of potential growth of 6.5-7 percent in India that is considered non-inflationary.
In addition to the repo rate, MPC also changed Standing Deposit Facility (SDF), to 5 and Marginal Standing Facility (MSF), to 5.5.
They have also decided to do the forex swaps and purchase bonds worth 1 lakh crore through the Open Market Operations (OMO) auctions with hopes that they would ease transmission of the monety and be able to offer enough liquidity.
2025 Wrap
In December of 2025, Malhotra reported that the year recorded a strong growth and a benign inflation in spite of the challenges causing changes that continued in the year because of the geopolitical and trade uncertainties.
The position by RBI is neutral and RBI looks forward to the new year with fresh hopes, enthusiasm and resolve and said that the financial parameters of the bank are sound with the bank credit experiencing upswing and retail lending favours growth.
RBI monetary policy, repo rate and liquidity support In addition to the cut in repo rate, their monetary statement has the steps of liquidity support. In December, the open market operations of RBI will be Rs. 1 lakh crore. They also have a three year USD/INR swap of 5 billion dollars that will help to smooth money market and relieve the financial strain.
The reaction of bond traders to the signals in the monetary policy of RBI and the increase in the repo rate was rapid. The yield of government bonds went down following the introduction of the liquidity measures. The 10 year benchmark yield went down by 3 basis points to 6.47 against the previous day close of 6.51 indicating some relief in borrowing.
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