Day 3
Economy & BudgetImportant2025-12-05
RBI Cuts Repo Rate to 5.25 Percent
In News
What Happened
On December 5, 2025, the Reserve Bank of India's Monetary Policy Committee unanimously reduced the policy repo rate by 25 basis points to 5.25 percent. The committee maintained a 'neutral' policy stance while making this decision. Concurrently, the RBI upgraded India's real GDP growth projection for FY26 to 7.3 percent.
Why It Matters
This rate cut lowers borrowing costs for consumers and businesses, which can stimulate domestic consumption and corporate investment. It signals the central bank's confidence in India's macroeconomic stability, capitalizing on a 'goldilocks period' of robust economic growth coupled with manageable inflation.
Background
History & Context
The Monetary Policy Committee operates under the Flexible Inflation Targeting framework, aiming to keep consumer price inflation at 4 percent with a tolerance band of 2-6 percent. Prior to this decision, the MPC had maintained a prolonged pause on rate cuts to ensure inflation firmly aligned with its target. The shift to a rate cut signals that the committee is satisfied with the inflation trajectory and is now providing a slight boost to support continued economic expansion.
What Changed
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Policy Repo Rate: BEFORE it was 5.50 percent, NOW it is 5.25 percent.
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Real GDP Growth Projection (FY26): BEFORE it was estimated at 6.8 percent, NOW it is projected at 7.3 percent.
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Monetary Policy Stance: BEFORE it transitioned from withdrawal of accommodation to neutral, NOW it is firmly maintained at 'neutral', allowing flexibility for future actions.
Prelims Angle
NCERT Connection
This development is a direct application of the Liquidity Adjustment Facility (LAF) discussed in Class 12 Macroeconomics Chapter 3 (Money and Banking). By lowering the repo rate, the RBI reduces the cost at which commercial banks borrow short-term funds, thereby increasing the overall money supply and credit creation in the economy.
Practice Questions
Q1
Correct Statement(s)Which of the following statements is/are correct regarding the monetary policy tools and stances of the Reserve Bank of India? 1. A reduction in the repo rate is generally intended to decrease the money supply in the economy. 2. A 'neutral' monetary policy stance indicates that the central bank can either cut or increase interest rates depending on incoming economic data.