The Monetary Policy Committee (MPC) unanimously decided to reduce the policy repo rate by 25 bps to 5.25% in the December 2025 policy review, while five of the six members voted to maintain the neutral policy stance. As expected, the Committee pared its FY2026 CPI inflation forecast by 60 bps to 2.0% relative to the October 2025 estimate, while simultaneously raising the GDP growth projection to 7.3% from the 6.8% indicated earlier. While the tone of the policy document was benign, we believe that today’s rate cut is the final one in the current easing cycle. Any further rate easing from current levels would only be likely if there is a material downward undershooting in growth outcomes, which results in a cut in growth projections. Additionally, the RBI has decided to infuse durable liquidity in December 2025 via open market operation (OMO) purchase of G-secs (amounting to Rs. 1.0 trillion) and $5 billion USD/INR 3Y buy-sell swap auction, amidst the likely seasonal tightening of liquidity conditions owing to advance tax outflows and higher currency leakages. This is expected to augur well for transmission as well as G-sec yields.

• The MPC unanimously reduced the policy repo rate by 25 bps to 5.25% in the December 2025 policy review. Consequently, the standing deposit facility (SDF) rate was lowered to 5.00%, and the marginal standing facility (MSF) rate and the Bank Rate to 5.50% each. Additionally, the MPC maintained the neutral policy stance, although one member voted for a shift to an accommodative stance.
• The Committee noted that the decline in headline and core inflation has become generalised. It pared the FY2026 CPI inflation forecast to 2.0% from 2.6% indicated in October 2025, reflecting a material downward revision in Q3 (+0.6% in December 2025 vs. +1.8% in October 2025) and Q4 (+2.9% vs. +4.0%). Besides, it lowered the Q1 FY2027 estimate by 60 bps to 3.9% and placed the Q2 FY2027 CPI inflation estimate at 4.0%.

EXHIBIT 1: Movement in Key Rates

Source: RBI; CEIC; ICRA Research