RBI MPC Meeting Highlights: RBI cuts repo rate by 25 bps to 5.25%, maintains neutral stance
The Reserve Bank of India's Monetary Policy Committee (MPC) cut the policy repo rate by 25 basis points to 5.25% at its December 2025 bi-monthly review
The Standing Deposit Facility (SDF) rate was correspondingly lowered to 5.00%, and the Marginal Standing Facility (MSF) rate and Bank Rate were set at 5.50% each
Five of the six MPC members voted to retain the "neutral" policy stance, while one member voted for an "accommodative" stance
The FY26 CPI inflation forecast was revised down by 60 basis points to 2.0%, while the FY26 real GDP growth projection was raised to 7.3% from an earlier estimate of 6.8%
The rate cut followed two consecutive meetings without a change, and came against a backdrop of GDP growth of 8.2% in the second quarter of the current financial year alongside historically low inflation
Monetary Policy Committee (MPC) — Composition and Legal Basis
The MPC is a six-member statutory body constituted under Section 45ZB of the RBI Act, 1934 (inserted by the Finance Act, 2016), tasked with determining the policy repo rate needed to achieve the inflation target while supporting growth. It replaced the earlier system where the RBI Governor alone effectively decided the policy rate after internal consultation.
Key Details
- Three members are from the RBI: the Governor (ex officio Chairperson), the Deputy Governor in charge of monetary policy, and one RBI officer nominated by the Central Board
- Three external members are appointed by the Central Government on the recommendation of a search-cum-selection committee, for a fixed four-year term with no reappointment
- Under Section 45ZI, the RBI must hold at least four MPC meetings a year; each member has one vote, and the Governor holds a casting vote in case of a tie
- Voting-pattern disclosure (as seen with the 5:1 split on stance in this meeting) is a transparency feature — individual MPC members' votes and statements are published in the minutes
The 5:1 split on maintaining a "neutral" versus shifting to "accommodative" stance illustrates the MPC's individual-vote transparency mechanism and shows the Committee balancing a sharp downward inflation revision against the case for further easing.
Flexible Inflation Targeting (FIT) Framework
India adopted Flexible Inflation Targeting in 2016 through an amendment to the RBI Act, 1934, under which the Central Government notifies an inflation target once every five years in consultation with the RBI, under Section 45ZA.
Key Details
- The current target is CPI inflation of 4%, with a tolerance band of +/- 2% (i.e., 2%–6%)
- If inflation remains outside the tolerance band for three consecutive quarters, the RBI must submit a report to the Government explaining the reasons for failure and the remedial measures proposed (an accountability/failure clause under the FIT framework)
- The framework shifted India from a multiple-indicator approach to a single, numerically anchored inflation target
A CPI forecast of 2.0% for FY26 sits at the lower edge of the tolerance band, giving the MPC policy space to cut rates without breaching the mandated inflation ceiling.
Repo Rate, SDF, MSF and the Liquidity Adjustment Facility (LAF) Corridor
The repo rate is the rate at which the RBI lends short-term funds to banks against government securities; it is the primary tool used to signal the direction of monetary policy. The Standing Deposit Facility (introduced in April 2022, replacing the reverse repo as the floor) and the Marginal Standing Facility (the ceiling, introduced in 2011) together define the Liquidity Adjustment Facility corridor within which short-term money market rates move.
Key Details
- SDF is an uncollateralized facility for absorbing liquidity (floor of the corridor)
- MSF allows banks to borrow overnight against government securities at a penal rate above the repo rate (ceiling of the corridor)
- The Bank Rate, historically used for discounting/rediscounting bills, is now aligned with the MSF rate
- A rate cut is transmitted through this corridor to bank lending and deposit rates, though transmission is often lagged and incomplete (linked to External Benchmark Lending Rate, EBLR, norms since 2019)
The simultaneous adjustment of SDF (5.00%), repo (5.25%) and MSF/Bank Rate (5.50% each) preserves the standard 25-bps-wide LAF corridor around the new repo rate.
- New repo rate: 5.25% (cut by 25 bps in December 2025)
- SDF: 5.00%; MSF and Bank Rate: 5.50% each
- MPC vote on stance: 5 members for "neutral", 1 member for "accommodative"
- FY26 CPI inflation forecast: revised down 60 bps to 2.0%
- FY26 real GDP growth projection: raised to 7.3% (from 6.8%)
- Q2 FY26 GDP growth: 8.2%
- Cumulative rate cuts since February 2025 (prior to this pause-then-cut cycle): 100 bps, taking repo from 6.5% to 5.5% by June 2025, before this further 25 bps cut to 5.25%
- Inflation target under FIT framework: 4% +/- 2% (statutory, reviewed every 5 years)