RBI MPC cuts repo rate by 25 bps to 5.25%, maintains neutral stance; revises GDP, inflation forecast for FY26

Synopsis
Latest Monetary Policy Committee meeting updates: The RBI's Monetary Policy Committee cut the policy repo rate by 25 basis points to 5.25%, maintaining a neutral stance. This decision follows a significant drop in inflation to a multi-decade low and robust GDP growth of 8.2% in Q2 FY2026. The move aims to provide monetary support amidst favorable economic conditions.
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The RBI-led Monetary Policy Committee (MPC) on Friday concluded its three-day meeting and unanimously decided to cut the policy repo rate by 25 basis points to 5.25%, according to Governor Sanjay Malhotra.
Consequently, the standing deposit facility (SDF) rate was revised to 5% from 5.25%, while both the marginal standing facility (MSF) rate and the Bank Rate were revised down to 5.5% from 5.75%.
Explaining the rationale behind the rate cut, the RBI governor said, "The growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum."
The MPC also decided to maintain the policy stance as neutral, signalling how the central bank views the balance between price stability and growth support going forward.
"The repo rate cut, along with liquidity easing measures, announced by the RBI is exactly in line with our expectations. With RBI continuing to leave room open for further easing, we do not rule out another 25bps cut, with the likely terminal rate at 5% followed by a prolonged pause," Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
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Growth, Inflation and Liquidity Outlook
The MPC revised India’s GDP outlook for FY26 upwards to 7.3%, as compared to the earlier estimate of 6.8%. This can be attributed to the country's robust growth momentum.
Also Read: RBI GDP Growth 2025: Central bank raises FY26 growth forecast to 7.3%
In the second quarter of FY2026 (July–September), GDP growth accelerated to 8.2%, marking one of the fastest quarterly expansions in recent times. Such robust growth, combined with easing inflation, has created what many analysts see as an opportunity for the RBI to provide additional monetary support.
Meanwhile, the inflation target was revised downwards to 2% for FY26, from 2.6% estimate announced earlier in October. The MPC also released updated quarterly projections: 0.6% for Q3, 2.9% for Q4, 3.9% for Q1, and 4.0% for Q2 of FY27.
Also Read: RBI Inflation FY2025-26: MPC slashes inflation aim to 2% as food prices ease
In comparison, the October round had pegged inflation at 1.8% in Q3, 4% in Q4, and 4.5% for Q1 FY27.
The December meeting comes against the backdrop of a sharp deceleration in inflation. The headline retail inflation, measured by the consumer price index, recently slumped to a multi-decade low of roughly 0.25%. A significant decline in food prices and recent GST cuts on consumer goods have helped drive this fall.
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