In a major move amid a strong economic environment, the Reserve Bank of India (RBI) cut its repo rate by 25 basis points to 5.25% on December 5, 2025—the fourth cut since February, taking the total to 100 bps—while maintaining a neutral stance. This unanimous Monetary Policy Committee (MPC) decision, announced by Governor Sanjay Malhotra, was a departure from tradition as GDP grew 8.2% in Q2 FY26 and CPI inflation fell to a historic low of 0.25% in October—well below the target of 4%.
SBI Research’s Ecowrap calls the move “exceptional”, and cites just a few similar examples around the world: in the UK, rates were cut between 11% inflation and 12.5% expansion in a “growth spurt” under Chancellor Anthony Barber in the 1970s; Indonesia had a recession with 8.6% growth and 7.4% inflation before the 1995–97 Asian crisis. Only China’s 2012–15 easing was matched by India’s low inflation environment (1.8% CPI, 7.4% GDP). “The RBI has done its best to support growth… now the market should show maturity and not get too excited,” the report said, and cautioned against overreacting to the “turbulent global order.”
### Inflation Outlook: Declining trend confirmed
Citing low food inflation pressures, bumper kharif output, good rabi sowing, abundant reservoirs and favorable soil moisture, the RBI cut the CPI estimate for FY26 to 2.0% from 2.6% in October and 4.2% in February. SBI has estimated growth of 1.8% for FY26 and 3.4% for FY27, indicating an “unprecedented decline” and the possibility of further easing. It also added that “repo will remain low at 5.25% for a longer period of time,” the impact of which is clearly visible: new lending rates are down 69 bps since February, deposits are down 105 bps. ### Growth projections: strength amid difficulties
RBI has estimated real GDP growth for FY26 at 7.3% (lower than earlier estimates), with Q1 FY27 estimated at 6.7% and Q2 at 6.8%. According to the report, there is a danger of reducing external demand due to threats of US tariffs, trade conflicts and geopolitical tension. Still, SBI remains bullish: up 7% in Q3/Q4, up 7.6% for the full year—driven by domestic strength.
Malhotra called it a “rare Goldilocks period”: high growth, very low inflation. “We look forward to the new year with optimism and enthusiasm…to accelerate progress,” he said, underscoring the policy’s focus on growth despite global instability.
Markets reacted sluggishly: Sensex/Nifty closed marginally higher by 0.5% on Friday, but maintained weekly losses due to FII outflows. SBI warns: Don’t get too excited; Focus on fundamentals. As a Santa Claus rally sets in, this cut—rare in boom times—reinforces the RBI’s proactive stance, but the path to 2026 will be shaped by continued maturity.
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