Key Highlights

• RBI cuts repo rate by 25 bps to 5.25%

• Inflation drops to multi year lows, supported by soft core inflation

• Rupee touches record lows amid global volatility and capital outflows

• Governor Malhotra says inflation is “firmly under control” but rupee remains under pressure

• Growth trends are strong across demand, manufacturing and services

• RBI keeps a neutral stance, leaving room for future flexibility

• Liquidity support remains a priority to ensure smooth financial conditions

RBI Cuts Rates by 25 bps as Inflation Cools and Growth Remains Strong

The Reserve Bank of India announced a 25 basis point rate cut, taking the repo rate down to 5.25%. This decision comes at a moment when India is seeing a rare combination of low inflation and strong economic momentum.

While the domestic picture looks positive, the RBI faces new challenges due to the Indian rupee’s sharp weakness in recent weeks. The currency has moved to record lows as global markets remain volatile and foreign investors pull out funds.

Governor Sanjay Malhotra described the current environment as a “rare Goldilocks period” - steady growth, low inflation, and manageable risks - but also pointed out that global forces are creating pressure on the rupee.

Inflation : The Key Driver Behind the Rate Cut

Inflation remained the central theme of today’s policy message.

• Headline inflation has fallen to multi year lows.

• Core inflation has softened due to lower housing, transport and services costs.

• Food inflation is volatile by nature but currently manageable.

The RBI said inflation is “well-anchored” and staying comfortably within target. This stability is what allowed the central bank to resume easing.

Governor Malhotra noted:

RBI on the Rupee : Why the Currency Has Fallen

The rupee has slipped to record lows near ₹90 per dollar. According to the RBI, this decline is driven by:

• FPI outflows

• A wider trade deficit

• Global risk-off sentiment

• A stronger U.S. dollar

• Volatility in global commodities

Governor Malhotra explained that the recent depreciation is “a natural adjustment to global conditions.” He stressed that the RBI’s role is to reduce volatility, not defend a fixed level for the rupee.

India’s strong FX reserves, stable current account, and consistent remittances give the RBI confidence that the external sector remains well-supported.

India’s Growth Momentum : Still Strong and Broad-Based

The RBI said India’s growth cycle remains healthy and widespread across key sectors.

Demand Conditions

• Urban spending remains firm.

• Rising incomes are boosting consumption.

• Consumer confidence is above long-term averages.

Investment Cycle

• Private investments are improving.

• Capacity utilisation is rising.

• Manufacturing and capital goods companies are reporting strong order books.

• Exports are showing early signs of recovery.

Manufacturing and Services PMIs

Both sectors continue to remain in expansion mode, pointing to strong economic activity.

Malhotra summed up the economic outlook as:

Jobs and Labour Market Trends

The RBI highlighted a clear improvement in hiring:

• Job creation is rising across services, manufacturing, and construction.

• Urban hiring remains strong due to growth in the formal sector.

• Workforce participation is improving in both formal and semi-formal segments.

This trend suggests that the ongoing growth cycle is becoming more inclusive.

Rupee Outlook: What the RBI Expects Ahead

The RBI offered a balanced view of the currency:

• The rupee’s trend matches global currency movements.

• Large FX reserves and strong remittances offer a natural shield.

• The RBI will intervene only when volatility becomes disruptive.

This suggests the central bank is comfortable with some currency flexibility as long as broader financial stability is maintained.

Why Today’s Rate Cut Matters

The 25 bps cut is expected to support:

• Lower borrowing costs for households and businesses

• Improved credit flow for MSMEs and rate-sensitive sectors

• Stronger domestic momentum at a time of global uncertainty

The RBI made it clear that the goal is to support growth without risking inflation or financial stability.

What Comes Next : RBI’s Forward Guidance

The RBI has kept a neutral stance, meaning it is open to either more cuts or a pause. Future decisions will depend on:

• Inflation trends in the next few quarters

• Rupee movement and global currency swings

• Wage growth and job market data

• Crude oil prices and global commodity risks

• Geopolitical and financial market developments

The RBI stressed that policy will remain flexible and data-driven.

Final Word

This rate cut marks a careful yet confident step by the RBI. With inflation low and growth strong, the central bank has room to support the economy. But the rupee’s weakness adds an external risk that cannot be ignored.

For now, the RBI has taken a balanced approach - encouraging growth while keeping an eye on inflation and currency stability. Whether this becomes the start of a wider easing cycle will depend on how global and domestic conditions evolve in the months ahead.

Sources

• RBI Monetary Policy Interaction – Dec 2025

• Reuters: India Rupee Weakens Past ₹90/USD

• Reuters: RBI Chief Says Room for More Cuts

• FT: India Cuts Rates amid Low Inflation & Strong Growth

• Economic Times: RBI Liquidity Measures & Rupee Pressure