In a bid to support the "goldilocks" economy and counter high US tariffs, the RBI on Friday cut its key benchmark interest rate and committed to a Rs 1 lakh crore liquidity boost for the banking sector. The decision is likely to make home, auto, and other loans cheaper for consumers.
The monetary policy committee unanimously voted to lower the repo rate by 25 basis points to 5.25 per cent and retained a neutral policy stance, signalling room for further rate adjustments if needed.
The step is being seen as lending support to the economy that has been hit hard by the steep 50 per cent tariff US President Donald Trump slapped on Indian goods.
The move had already led to a dip in export and widening of trade deficit as well as pushed rupee to a record low.
RBI's move will supplement government efforts in lending support to the economy in form of biggest GST reforms, relaxing labour rules and easing financial sector regulations.
A cut in the repo rate will lead to lower borrowing costs for individuals as well as corporate because it reduces the interest banks pay to borrow from the RBI. With cheaper funding, banks can lower lending rates such as MCLR and base rates, making home, auto, and business loans more affordable.
This reduces EMIs, encourages consumers and businesses to borrow more, and supports economic activity.
Also read: Rupee falls 5 paise to close at 89.94 against USD
The RBI also reiterated its commitment to providing adequate liquidity to the banking system as it announced intent to conduct open market purchases of government bonds up to Rs 1 lakh crore in two tranches of Rs 50,000 crore each on December 11 and 18 and a buy-sell swap of USD 5 billion on December 16.
Both measures will add durable liquidity at a time when banks face seasonal liquidity pressures.
This is the fourth rate cut by the central bank since February 2025, taking the total to 125 basis points. It held rates in August and October bimonthly monetary policy meetings.
"Inflation at a benign 2.2 per cent and growth at 8.0 per cent in H1: 2025-26 (April-September of 2025-26 fiscal year) present a rare goldilocks period," Malhotra said announcing the monetary policy decisions.
The RBI lowered its inflation forecast for the fiscal year through March to 2 per cent from 2.6 per cent, while raising its GDP growth projection to 7.3 per cent, from the previous estimate of 6.8 per cent.
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