RBI cuts key repo rate by 25 basis points to 5.25%; revises economic growth upward to 7.3% in FY26

In a move that may reduce EMI burden for home or vehicle loan takers, the Reserve Bank of India (RBI) today reduced the key (repo) rate by 25 basis points to 5.25 per cent, a fourth in the year 2026 mainly due to lower inflation rate and better than expected economic growth in the first half. The reduction may, however, put pressure on the savings for the senior citizens as the banks are likely to lower the rates on the Fixed Deposits (FDs)

The Central Bank has revised upward the economic growth projections for the year 2025-26 at 7.3 per cent from 6.8 percent predicted earlier.

The Monetary Policy Committee (MPC) met on the 3rd, 4th and 5th of December to deliberate and decide on the policy repo rate. After a detailed assessment of the evolving macroeconomic conditions and the outlook, the MPC voted unanimously to reduce the policy repo rate by 25 basis points (bps) to 5.25 per cent with immediate effect, RBI Governor Sanjay Malhotra said after announcing the policy.

The Committee noted that the headline inflation has eased significantly and is likely to be softer than the earlier projections, primarily on account of the exceptionally benign food prices. Reflecting these favourable conditions, the projections for average headline inflation in 2025-26 and Q1 of 2026-27 have been further revised downwards. Core inflation, which had been rising steadily since Q1 of 2024-25, eased at the margin in Q2 of 2025-26 and is expected to remain anchored in the period ahead.

Both headline and core inflation are expected to be at or below the 4 per cent target during the first half of 2026-27. The underlying inflation pressures are even lower as the impact of increase in price of precious metals is about 50 basis points (bps). Growth, while remaining resilient, is expected to soften somewhat.

In a twin advantage, along with lower inflation rate the real gross domestic product (GDP) registered a six-quarter high growth of 8.2 per cent in the Q2 of 2025-26, underpinned by resilient domestic demand amidst global trade and policy uncertainties. On the supply side, real gross value added (GVA) expanded by 8.1 per cent, aided by buoyant industrial and services sectors.

According to estimates, the domestic economic activity is holding up in Q3, although there are some emerging signs of weakness in few leading indicators. GST rationalisation and festival-related spending supported domestic demand during October-November. Rural demand continues to be robust while urban demand is recovering steadily, Malhotra said, adding Investment activity remains healthy with private investment gaining steam on the back of expansion in non-food bank credit, and high capacity utilisation.

Merchandise exports declined sharply in October amid subdued external demand, accompanied by softer services exports. On the supply side, agricultural growth is supported by healthy kharif crop production, higher reservoir levels and better rabi crop sowing. Manufacturing activity continues to improve, while the services sector is maintaining a steady pace, the Central Bank noted.

Looking ahead, domestic factors such as healthy agricultural prospects, continued impact of GST rationalisation, benign inflation, healthy balance sheets of corporates and financial institutions and congenial monetary and financial conditions should continue to support economic activity. Continuing reform initiatives would further facilitate growth.

On the external front, services exports are likely to remain strong, while merchandise exports face some headwinds. External uncertainties continue to pose downside risks to the outlook, while speedy conclusion of various ongoing trade and investment negotiations present upside potential. Taking all these factors into consideration, real GDP growth for 2025-26 is projected at 7.3 per cent, with Q3 at 7.0 per cent; and Q4 at 6.5 per cent.

Real GDP growth for Q1 of 2026-27 has been pegged at 6.7 per cent and Q2 at 6.8 per cent. The risks are evenly balanced, Malhotra said in his statement.

The RBI Governor concluded saying “Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience and is poised to register high growth. The headroom provided by the inflation outlook has allowed us to remain growth supportive. We will continue to meet the productive requirements of the economy in a proactive manner while ensuring macroeconomic stability.”