Borrowers can expect lower monthly payments on home and car loans after the central bank cut its key lending rate for the first time in months, citing a “Goldilocks” phase of high growth and low inflation.
The Reserve Bank of India (RBI) has cut the benchmark repo rate by 25 basis points to 5.25%, its lowest level since mid-2024. The unanimous decision by the Monetary Policy Committee (MPC) on Friday (5 December) comes as a relief to millions of borrowers, signaling the start of a cheaper interest rate cycle aimed at sustaining the country’s economic momentum.
RBI Governor Sanjay Malhotra announced that the central bank had also revised its GDP growth forecast for the fiscal year 2026 upwards to 7.3%, citing a robust 8.2% expansion in the July-September quarter.
The primary driver for the rate cut is the dramatic fall in retail inflation, which dropped to a record low of 0.25% in October. This “benign” inflation environment has given the central bank the room to pivot toward supporting growth without worrying about price stability.
Following the announcement, financial markets rallied. The Sensex and Nifty indices opened higher, with interest-rate-sensitive sectors like real estate (Nifty Realty up 1.5%) and automobiles leading the charge. The Indian Rupee also appreciated by 20 paise to trade at 89.69 against the US dollar.
“The growth-inflation balance… continues to provide the policy space to support the growth momentum,” Governor Malhotra stated, describing the current economic landscape as a “rare Goldilocks period”.
Real estate experts welcomed the move. “The reduction in repo rate… is a timely step that strengthens momentum in the housing sector. A decrease… can meaningfully influence sentiment, especially for first-time buyers,” said Vijay Wadhwa, Chairman of The Wadhwa Group.
This is the first rate cut after a prolonged pause where the repo rate was held steady at 5.5%. The decision effectively lowers the cost at which banks borrow from the RBI, which typically translates into lower interest rates for consumers on floating-rate loans.
However, the move is a double-edged sword for savers. While borrowers benefit, banks are expected to lower interest rates on fixed deposits (FDs) and small savings schemes in the coming weeks, reducing returns for retirees and conservative investors.
With the central bank projecting inflation to remain low at around 2% for the next fiscal year, analysts predict this could be the first of several rate cuts. The focus now shifts to commercial banks to see how quickly they pass on the benefit of this 0.25% cut to their customers.
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