Why is this issue in the news?

  • The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points (bps), reducing it from 5.50% to 5.25%.
  • This decision was taken by the Monetary Policy Committee (MPC) in its December 2025 policy meeting.
  • The RBI Governor described the current situation as a “rare Goldilocks period”, where economic growth is strong and inflation is low and stable.
  • This move is expected to reduce loan interest rates, lower EMIs, and support economic growth.

WHAT IS THE REPO RATE?

  • The repo rate is the interest rate at which RBI lends money to commercial banks.
  • When the repo rate is cut:
    • Banks can borrow at a lower cost.
    • Lending rates usually come down.
    • Loans become cheaper for consumers and businesses.
  • Therefore, a repo rate cut is a growth-supporting monetary policy tool.

WHAT IS MPC?

  • The Monetary Policy Committee (MPC) is the body responsible for deciding India’s monetary policy, especially interest rates.
  • It was established under the RBI Act, 1934, through an amendment in 2016.
Composition of the MPC
  • The committee has six members.
  • Three members are from the RBI:
    • The RBI Governor (Chairperson)
    • One Deputy Governor
    • One RBI official nominated by the Central Board of the RBI
  • Three members are external experts appointed by the Central Government.

How does MPC take decisions?

  • Each member has one vote.
  • Decisions are taken by majority voting.
  • In case of a tie, the RBI Governor has a casting vote.
Main objectives of the MPC
  • To maintain price stability, meaning control inflation.
  • To support economic growth, without allowing inflation to rise uncontrollably.
  • To achieve the inflation target of 4% ± 2% under the inflation targeting framework.

KEY DECISION OF RBI MPC

  • The repo rate was cut by 25 bps to 5.25%.
  • This decision was taken unanimously by the MPC.
  • This was the first repo rate cut after two consecutive policy pauses.
  • The previous rate cut took place in June 2025, when the repo rate was reduced by 50 bps.
  • Total repo rate cut in FY 2025–26 so far: 100 bps (from 6.25% to 5.25%)
WHY DID RBI CUT REPO RATE NOW? The RBI cited two main reasons: A. Strong economic growth
  • India’s economy performed better than expected.
  • The RBI increased its GDP growth projection for FY26.
B. Cooling inflation
  • Inflation has continued to decline steadily.
  • The inflation outlook is now considered benign and well-anchored.
Because of this favourable growth–inflation balance, RBI felt it had policy space to support growth.

IMPACT OF REPO RATE CUT ON COMMON BUSINESSES & PEOPLE

  • EMIs are expected to fall on:
    • Home loans
    • Vehicle loans
    • Personal loans
    • Corporate loans
    • MSME and small business loans
  • Lower borrowing costs are expected to:
    • Boost consumption.
    • Encourage private investment.
  • Overall, the move supports a growth-friendly environment.

RBI’S VIEW ON RUPEE DEPRECIATION

  • The Indian rupee breached the psychological 90-mark against the US dollar.
  • RBI Governor stated that:
    • RBI does not target any specific exchange rate level.
    • Currency value is determined by market forces.

Important clarification:

  • RBI intervenes only to prevent excessive or abnormal volatility, not to fix a rate.
  • The rupee closed at ₹89.95 per dollar, compared to ₹89.89 the previous day.
RBI on forex market intervention
  • The Governor stated that there has been no change in RBI’s tolerance to volatility.
  • RBI continues to follow a market-determined exchange rate regime.
Liquidity measures announced by RBI
  • To ensure adequate liquidity in the financial system, RBI announced:
Open Market Operations (OMO)
  • Purchase of government securities worth ₹1 lakh crore.
USD/INR Buy–Sell Swap
  • Three-year swap worth USD 5 billion.
  • Aimed at injecting durable liquidity.