RBI MPC Cuts Repo Rate By 25 Basis Points, Governor Malhotra Cites Soft Inflation, GST Rate Cuts As Tailwinds

Quite in line with the expectations, the Monetary Policy Committee (MPC) headed by Reserve Bank of India (RBI) Governor Sanjay Malhotra, on Friday, reduced the repo rate by 25 basis points. Addressing the crucial meeting, Governor Malhotra said that the healthy manufacturing activity, Agri output and encouraging numbers reported by India Inc have provided tailwinds for a neutral policy stance.

Underlining that the core inflation projects are well within the RBI's stipulated limits, Malhotra said that there is space for a further cut in repo rate.

“The MPC has unanimously reduced the policy repo rate by 25 basis points to 5.25% with immediate effect. Evolving geopolitical and trade environments continue to weigh on the outlook. While headline inflation remains above target in advanced economies, pressures in emerging markets are contained, allowing room for accommodative monetary policy. Global equity markets face conflicting pulls from AI‑fueled optimism and high valuations, with divergent central bank policies adding uncertainty to capital flows and yield spreads," Malhotra said.

The RBI's decision to reduce the repo rate down to 5.25%, comes on the backdrop of a series of cuts by the central band throughout 2025. Noting that reforms such as GST rate cuts have boosted the consumption in the economy, Malhotra said that the year gone by has been ‘satisfying’.  

“The economy witnessed robust growth and benign inflation. Since the October policy, the Indian economy has witnessed rapid disinflation, with inflation dipping to a mere 0.3% in October 2025. Real GDP growth accelerated to 8.2% in Q2, aided by strong festive spending and rationalisation of GST rates. Inflation at a benign 2.2% and growth at 8% for the first half of the year presents a rare Goldilocks period,” he further added.

With external uncertainties posing downside risks, the Governor expects Services export to remain strong while merchandise exports to face ‘headwinds’. 

“Taking all factors into account, real GDP growth for this year is projected at 7.3%, up from earlier estimates, with Q3 at 7%, Q4 at 6.5% and next year’s Q1 and Q2 at 6.7% and 6.5%,” Malhotra said. 

The fall in CPI inflation well below the RBI's medium-term target of 4% provided the necessary room for a rate cut. 

The ‘faster-than-anticipated’ disinflation was primarily spearheaded by a notable and broad-based correction in food prices.  He further said, "This easing of price pressures, especially in the volatile food component, provides crucial policy space and reinforces the improving inflation outlook, supporting the ongoing recovery of domestic demand.”

Revising the inflation projection down from 2.6% earlier to 2% for the current financial year, the RBI Governor added, "The inflation outlook provides headroom for us to remain growth supportive while ensuring macroeconomic stability.”

Informing about the resilient external sector Malhotra said, “India’s forex reserves stand at a healthy USD 686 billion, providing more than 11 months of import cover…we are confident of meeting our external financing requirements comfortably.”

"The RBI’s 25 bps cut to 5.25% is a timely, growth-oriented move supported by a soft inflation backdrop, with core CPI easing and the full-year print expected near 2%. The liquidity boost through OMOs and the USD/INR swap will help lower funding costs and improve credit transmission. For the equity market, the policy is constructive for rate-sensitive sectors like Banks, NBFCs, Autos and Real estate stand to benefit from a better demand outlook and stronger earnings visibility. By retaining a neutral stance, the RBI has kept the door open for further calibrated easing while maintaining macro stability amid a broadening economic recovery," said Dr. Ravi Singh, Chief Research Officer from Master Capital Services Ltd.

“The RBI’s 25 basis points rate cut reflects a cautious step towards supporting the country’s growth. While the policy easing signals that the rate-cut cycle has begun, it also serves as a reminder that the central bank moves gradually, even though markets respond instantly. The reduction to 5.25% highlights a measured approach to easing, where policy decisions are careful but their impact on sentiment is immediate. This easing cycle has already started influencing investor behaviour, particularly in interest-sensitive segments of the market. For investors, the move calls for a rethink of yield expectations and portfolio balance as lower rates may compress returns on fixed-income instruments and create shifts towards market-linked investments. Overall, this decision marks the beginning of a new phase in monetary policy and reinforces the importance of aligning investment strategies with a changing rate environment. The impact may be gradual in policy terms, but reactions in markets tend to be swift,” said Swapnil Aggarwal, Director, VSRK Capital.

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