RBI Lowers Repo Rate to 525% as Inflation Concerns Loom Over Future Decisions

The Reserve Bank of India (RBI) has taken a significant step by cutting the repo rate to 5.25% in December 2025. This move marks the final 25 basis points (bps) cut of the year, bringing the total easing to 125 bps from the 6.5% rate at the start of 2025. While this decision offers relief to borrowers and investors alike, rising inflation and economic data suggest the RBI may pause further cuts in the upcoming February 6, 2026 Monetary Policy Committee (MPC) meeting. This post breaks down what this means for home loan borrowers, fixed deposit investors, bond market participants, and anyone with floating-rate debts or investments.

What the RBI December 2025 MPC Decision Means

The RBI December 2025 MPC unanimously agreed to reduce the repo rate by 25 bps to 5.25%. This decision reflects a cautious but supportive stance toward growth, balancing the need to keep borrowing costs low while managing inflation risks.

• Total cuts in 2025: 125 basis points, down from 6.5% in January

• Current repo rate: 5.25%

• Next MPC meeting: February 6, 2026, with a pause expected according to Barclays and ICRA analysts

  
  

The RBI’s move signals a dovish approach from Governor Sanjay Malhotra, who has emphasized support for economic growth. Yet, the data, especially inflation figures, are forcing the central bank to exercise caution.

Inflation Surprises and Their Impact on Policy

December inflation came in at 1.33%, significantly above the RBI’s forecast of 0.6%. This upside surprise has raised concerns about inflationary pressures building up in the economy. Inflation above expectations means the RBI must carefully weigh the risks of further rate cuts.

Higher inflation can erode purchasing power and push up costs for consumers and businesses. It also limits the RBI’s room to ease monetary policy further without risking overheating the economy.

Transmission of Rate Cuts to Lending and Deposit Rates

One of the key benefits of the repo rate cuts this year has been the transmission of lower rates to borrowers and investors:

• Home loan rates have fallen by 50 to 75 bps, easing monthly EMI burdens for many borrowers.

• Fixed deposit (FD) rates have dropped to around 6.5-7%, down from a peak of 8%. This decline affects savers who rely on fixed income but reflects the overall easing in interest rates.

  
  

For those with floating-rate debts or investments, these changes mean more manageable repayments and potentially lower yields, respectively.

Growth Outlook Supports a Pause in February

The RBI has raised its growth forecast for the Indian economy to 7.3% from 6.8%. This upward revision reflects stronger-than-expected economic activity and resilience in key sectors.

With growth picking up, the RBI is likely to pause further rate cuts at the February 6, 2026 MPC meeting. Analysts at Barclays and ICRA expect the central bank to hold rates steady to monitor inflation trends and ensure the economy remains on a stable path.

What Borrowers and Investors Should Watch Next

• Home loan borrowers can benefit from the lower repo rate through reduced EMIs. However, with a pause expected, further rate cuts may not come soon.

• Fixed deposit investors should be prepared for FD rates to remain at current levels or decline slightly, reflecting the RBI’s cautious stance.

• Bond market participants need to watch inflation data closely, as rising inflation could push yields higher, affecting bond prices.

• Floating-rate debt holders should monitor RBI announcements, as any future rate changes will directly impact their interest costs.

  
  

Governor Sanjay Malhotra’s Signals and the Road Ahead

Governor Sanjay Malhotra has maintained a dovish tone throughout 2025, emphasizing support for growth and financial stability. Yet, the recent inflation data and economic indicators have forced the RBI to adopt a more cautious approach.

The central bank’s balancing act will continue in 2026, weighing the benefits of supporting growth against the risks of rising inflation. The expected pause in February reflects this careful calibration.