EMIs Set to Drop: RBI Delivers Surprise Rate Cut Amid 'Goldilocks' Scenario
🏦 In a major move that provides a strong boost to borrowers and the housing sector, the Reserve Bank of India (RBI) today, December 5, 2025, announced a 25 basis point (bps) cut in the policy Repo Rate. The decision, taken by the Monetary Policy Committee (MPC) after its three-day review, lowers the key lending rate from 5.50% to 5.25%, marking a continuation of the easing cycle driven by subdued inflation and robust economic growth.
RBI Governor Sanjay Malhotra-led MPC voted unanimously for the rate cut, a decision enabled by what the central bank termed a "Goldilocks moment" for the Indian economy: low inflation coupled with strong growth.
Key Policy Decisions at a Glance
The December 2025 MPC meeting delivered a clear signal of monetary support for economic momentum.
| Policy Indicator | New Rate | Change | Impact |
|---|---|---|---|
| Repo Rate | 5.25% | \downarrow 25 bps | Cheaper EMIs for home and car loans. |
| SDF (Standing Deposit Facility) | 5.00% | \downarrow 25 bps | Lower floor for the interest rate corridor. |
| MSF (Marginal Standing Facility) | 5.50% | \downarrow 25 bps | Lower ceiling for the interest rate corridor. |
| Policy Stance | Neutral | Unchanged | Signals flexibility for future action based on incoming data. |
The Repo Rate cut contributes to a cumulative 125 bps reduction in 2025, offering substantial relief to borrowers.
Macroeconomic Rationale: A Favourable Balance
The decision to cut rates was rooted in the evolving macroeconomic outlook:
* Sharp Easing of Inflation: Retail inflation, measured by the Consumer Price Index (CPI), has eased significantly, falling below the RBI’s lower tolerance band and creating substantial policy headroom. The RBI has revised the CPI inflation forecast for FY26 downward to 2.0% from the earlier 2.6% projection.
* Strong Growth Momentum: Despite global headwinds, the domestic economy has shown resilience. The RBI raised the Real GDP growth forecast for FY26 upward to 7.3% from its previous estimate of 6.8%. This growth is supported by robust domestic demand and gaining momentum in private investment.
Governor Malhotra emphasized that the current environment allows the RBI to pivot its focus toward supporting the economy's robust growth trajectory without compromising its inflation mandate.
Direct Impact on Borrowers and Sectors
The reduction in the policy rate has immediate and far-reaching effects on the financial landscape:
* Lower Loan EMIs: The cut will directly translate into lower interest rates for customers with floating-rate loans, particularly those linked to the External Benchmark Lending Rate (EBLR). Home loan and vehicle loan Equated Monthly Installments (EMIs) are expected to fall, improving affordability for both new and existing borrowers.
* Boost for Real Estate: The cumulative 125 bps cut throughout the year has made home financing significantly more attractive, providing a welcome boost to the housing and real estate sector as the year closes.
* Liquidity Measures: To ensure the rate cut is effectively passed on by banks (transmission), the RBI announced two major liquidity measures: Open Market Operations (OMOs) for purchasing government securities worth \approx ₹1 lakh crore, and a \approx \$5 billion dollar-rupee buy-sell swap to manage short-term liquidity and currency stability.
The RBI's decision maintains a 'Neutral' stance, indicating that while it has acted to support growth, it is not committing to a continuous easing cycle and will remain data-dependent for future policy moves.
