RBI Cuts Repo Rate to 5.25% as India Enters ‘Goldilocks’ Economic Phase
<p>The Reserve Bank of India (RBI) has delivered a significant boost to the economy by lowering the <strong>repo rate to 5.25%</strong>, following a unanimous vote by the Monetary Policy Committee (MPC). The 25-basis-point reduction — the second cut in six months after June’s 50-bps move — reflects the central bank’s growing confidence in India’s macroeconomic stability and its belief that the country is experiencing an exceptionally favourable <strong>“Goldilocks period”</strong> marked by strong economic growth and unusually low inflation.</p><p>RBI Governor <strong>Sanjay Malhotra</strong>, while announcing the decision, said the current economic environment provides the right balance for accommodative policy action. The cut is expected to ease borrowing costs across the financial system, benefiting consumers, businesses, and the broader economy.</p><h2><strong>Inflation Falls Below Target, Giving MPC Space to Cut Rates</strong></h2><p>The MPC’s decision was shaped significantly by India’s recent disinflation trend. Headline inflation dropped to levels not seen since India adopted the flexible inflation targeting (FIT) framework.</p><p>Governor Malhotra highlighted that the average inflation rate for the second quarter of FY 2025–26 fell to <strong>1.7%</strong>, slipping below the RBI’s lower tolerance band of 2% for the first time since FIT was introduced. The disinflationary trend continued into October, when inflation declined further to <strong>just 0.3%</strong>, underscoring the strength of the downward momentum.</p><p>“Since the October policy, the Indian economy has witnessed rapid disinflation,” Malhotra said. With both core and headline inflation expected to remain benign, the RBI sees adequate room to support economic growth without risking price instability.</p><h2><strong>Economic Growth Remains Strong and Steady</strong></h2><p>India’s economy has shown notable resilience, further justifying the RBI’s accommodative move. The country recorded <strong>8.2% real GDP growth</strong> in the second quarter — the highest in six quarters. This expansion was driven by robust domestic demand, increased consumption during the festive season, and the positive effects of rationalised GST rates.</p><p>Although some moderation is anticipated, the RBI’s outlook remains upbeat. The central bank has projected GDP growth of <strong>7.3% for FY 2025–26</strong>, pointing to continued economic strength.</p><p>Governor Malhotra described the present macroeconomic scenario as “a rare Goldilocks period," characterised by:</p><p><strong>Inflation at 2.2%</strong>, well below the mid-point target</p><p><strong>Growth at 8.0%</strong> in the first half of the fiscal year</p><p>This combination of low inflation and high growth created an ideal backdrop for reducing the policy rate.</p><h2><strong>Retail Borrowers to Benefit as EMIs Expected to Decrease</strong></h2><p>One of the most immediate impacts of the repo rate cut will be felt by retail borrowers. Lower policy rates usually translate into cheaper loan offerings across the banking sector. With monetary transmission already improving, the RBI expects EMIs on home loans, auto loans, and personal loans to decrease soon.</p><p>The central bank noted that the <strong>weighted average lending rate (WALR)</strong> for fresh rupee loans issued by Scheduled Commercial Banks has already fallen by <strong>69 bps since February 2025</strong>, signalling healthy rate transmission even before this latest cut.</p><h2><strong>Liquidity Support Through OMO Purchases and Currency Swaps</strong></h2><p>To ensure the financial system has enough liquidity to transmit the rate cut effectively, the RBI unveiled several supportive measures. Governor Malhotra announced:</p><p><strong>Open Market Operations (OMO) purchases</strong> of Government securities worth <strong>₹1,00,000 crore</strong></p><p>A <strong>3-year USD/INR Buy-Sell swap</strong> amounting to <strong>$5 billion</strong></p><p>These steps aim to inject durable liquidity into the system, stabilise the rupee, and boost credit growth.</p><p>Malhotra reiterated that the RBI’s stance remains <strong>“neutral,”</strong> signalling that future actions will depend on evolving economic conditions rather than a predetermined tightening or easing path.</p><h2><strong>A Balanced, Growth-Focused Policy Approach</strong></h2><p>The latest rate cut reflects the RBI’s commitment to supporting economic momentum while maintaining price stability. With inflation falling sharply and growth remaining strong, the central bank has seized the opportunity to stimulate the economy further.</p><p>The combination of robust liquidity measures, falling lending rates, and favourable macroeconomic conditions positions India for continued growth in the coming year. For households and businesses alike, the policy shift signals a period of lower borrowing costs and improving financial conditions.</p>