RBI MPC may cut repo rate by 25 bps

  Repo Rate Review Dec’ 25: 

25 bps cut in rate and change in stance likely

The bi-monthly review meeting of the Monetary Policy Committee (MPC) of Reserve Bank of India (RBI) is scheduled  for three days from 3rd December 2025 and the RBI Governor's statement on  the decisions of MPC is slated for the 5th day of this month.

Key Statistics:

1. CPI Inflation: In Oct 25, it is lowest at 0.25%. (food inflation -5.02%; core inflation steady at 4.4%)

2. GDP growth recorded the highest in 6 quarters: At 8.2% in Q2FY25 (Capital formation 7.3% Manufacturing 9.1%, Private Consumpation: 7.9%, Agriculture: 3.5%)

3. Fex Reserves: USD 688.1 billion 

4. Indian rupee versus USD breached ₹89 level and was trading at ₹89.5 last week. 

5. Fed rate was reduced by 25 bps  in Oct 25 and the market expects another cut of 25 bps in Dec 25

6. RBI cancelled its G-Sec auction for ₹11000 cr. on 31st Oct 25.

7. 10 year G-Sec (6.33% coupon rate) has hardened since issuance in May 2025 and is trading around 6.57% now. The earlier 10 year G-sec with 6.79% coupon rate, which was carrying a yield of 6.29% in June 2025, has also hardened by 24 bps since then. 

8. Liquidity in the banking system continues to be comfortable and was ₹ 1.50 lac cr. plus as per RBI's weekly statement as on 28th Nov' 25

9. India's trade deficit for Oct' 25 is USD 21.8 billion as merchandise trade deficit soared to USD 41.7 billion (imports USD 76.1billion and exports USD 34.4 billion)

My Views:

The declining value of rupee coupled with the significant increase in imports might fuel inflation in the medium term. But, it is also to be reckoned that the inflation rate is below the lower band of the targeted inflation of 4%(+/-2) for the last three months. Hence there is a need to adjust the repo rates, so that the real effective interest rate gets reflected in deposit/loan rates. The consecutive higher growth in GDP in the first  two quarters of this FY also suggests that the regulator, which aims to achieve inflation managed growth, might use the repo rate and monetary stance to convey its support to the economy. In this regard, though any reduction in the repo rate may not translate into reduction in the lending/deposit rates immediately, (except in the case of existing loans, which are linked to external bench mark rates), RBI MPC may still decide  to cut the repo rate by 25 bps and change its monetary stance to "accommodation" for the following reasons.

i. Dated G-Securities have hardened in the recent months. 10 year G-Sec is 105 bps plus over the current repo rate of 5.50%. 

ii. RBI had to cancel an auction of a 7 year bond in Oct' 25, as the coupon rate expectation of the bankers on the new issue was higher. 

The above two measures viz. reduction in repo rate and change in monetary stance will help to correct the aberration in G-Sec yield. 

Incidentally, this will help the government to complete its borrowing plan at reduced coupon rates and also motivate the bankers/corporates to issue new bonds at cheaper coupon rates.

Hence my bet is 'reduction in the repo rate by 25 bps' and a likely change in RBI's monetary stance from 'neutral' to 'accommodation'

MPC is also likely to review the inflation and growth forecasts, in the light of the healthy results in the two factors during the current financial year. 

Regards

V. Viswanathan
CGM Retd. e-SBT

2nd December 2025

Comments

  1. AnonymousDecember 3, 2025 at 10:02 AM

    Crisp & clear analysis Sir. Thankyou.
    I wonder whether the MPC will factor in the misgivings IMF seems to have on the accuracy of our growth figures. If not, it will be interesting to see their take on the impressive expansion of the economy coupled with continued & subdued inflation numbers.
    Regards
    Lakshmi

    ReplyDelete

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