RBI Cuts Interest Rates! Loans To Get Cheaper As Economy Booms - What It Means For YOU!

The Reserve Bank of India (RBI) has announced a significant monetary policy decision, reducing its key short-term lending rate, the repo rate, by 25 basis points to 5.25%. This move aims to further bolster economic growth, which recently surged to an impressive 8.2% in the second quarter of the current financial year.

The decision was made by the Monetary Policy Committee (MPC) during its fifth bi-monthly monetary policy announcement for the fiscal year. RBI Governor Sanjay Malhotra stated that the committee unanimously voted for the rate cut, maintaining a neutral monetary policy stance.

Economic Indicators Fueling the Decision

• The rate cut is largely supported by the persistent decline in retail inflation. Consumer Price Index (CPI) based headline retail inflation has remained below the government-mandated 2% lower band for the past three months.
• India's retail inflation dropped to a historic low of 0.25% in October 2025, marking the lowest level since the CPI series began.
• This low inflation environment, coupled with strong GDP growth, provided room for the central bank to ease monetary policy.

Cheaper Loans Expected

• The reduction in the repo rate is anticipated to translate into lower borrowing costs for consumers and businesses.
• Advances, including housing loans, auto loans, and commercial loans, are expected to become cheaper.
• This should help stimulate demand for big-ticket purchases and boost business investment.

Growth Outlook Revised Upwards

• The RBI has significantly raised its projection for India's economic growth for the current financial year.
• The new growth forecast stands at 7.3%, an increase from the previous estimate of 6.8%.
• This optimistic outlook reflects confidence in the economy's resilience and growth momentum.

Concerns Over Rupee Depreciation

• Despite the positive economic indicators, the Indian rupee has experienced significant depreciation.
• The rupee declined to historic lows, crossing 90 against the US dollar earlier this week, making imports more expensive.
• This weakening of the currency raises concerns about a potential rise in imported inflation, potentially offsetting some of the benefits of low domestic inflation.
• The rupee has depreciated by approximately 5% year-to-date.

Background of Easing

• This rate cut is part of a series of easing measures taken by the RBI amidst falling retail inflation.
• The central bank had previously reduced the repo rate by 25 basis points each in February and April, followed by a 50 basis point cut in June.
• Retail inflation has been trending below the 4% target level since February.

Impact

• This policy decision is expected to provide a significant boost to economic activity by making credit more accessible and affordable.
• Consumers may see reduced EMIs on loans, potentially increasing disposable income and encouraging spending.
• Businesses could benefit from lower funding costs, leading to increased investment and expansion.
• However, the depreciating rupee poses a risk of imported inflation, which could put pressure on the central bank's inflation management goals.
• Overall market sentiment may improve due to the accommodative monetary policy, but currency market volatility could remain a point of concern.
• Impact Rating: 7/10

Difficult Terms Explained

• Repo Rate: The interest rate at which the Reserve Bank of India lends money to commercial banks. It is a key tool used to control inflation and manage liquidity in the economy.
• Basis Points (bps): A unit of measure used in finance to describe small changes in interest rates or other percentages. 100 basis points equal 1 percent.
• Economic Growth (GDP): Gross Domestic Product (GDP) is the total monetary value of all the finished goods and services produced within a country's borders in a specific time period. It is a primary indicator of economic health.
• CPI (Consumer Price Index): An index that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
• Monetary Policy Committee (MPC): A committee constituted by the Central Government to decide the policy repo rate, needed to achieve the inflation target while keeping in mind the objective of growth.
• Neutral Stance: A monetary policy stance where the central bank aims to maintain inflation at the target level without actively trying to stimulate or restrain economic growth.