RBI Cuts Repo Rate to 5.25% Amid Cooling Inflation; SBI Says Move Signals Strong Growth Support

The Reserve Bank of India’s latest move to cut the repo rate by 25 basis points to 5.25 per cent reflects a clear commitment to support growth at a time when inflation is easing sharply and global uncertainties are rising, SBI said in its Ecowrap report.

The Monetary Policy Committee (MPC) voted unanimously for the cut and maintained a neutral stance.

SBI Research notes that the decision is unusual in the global context because central banks rarely reduce rates when growth is strong and inflation is extremely low. India currently has GDP growth above 8.2 per cent and inflation at just 0.25 per cent.

The RBI’s sharp downward revision in inflation projections is a key reason behind the policy move. Supported by better food supply conditions including higher kharif production, improved rabi sowing, strong reservoir storage and favourable soil moisture.

SBI Research, however, expects growth to average above 7 per cent in both the third and fourth quarters, leading to a higher full-year number of 7.6 per cent. Rural demand is holding strong after GST rationalisation and festive spending, while urban demand is showing a steady recovery. The new GDP series to be released in February 2026 may also revise these numbers.

Liquidity conditions have seen major swings this year. Surplus liquidity averaged Rs 2.3 lakh crore between April and August but dropped sharply to just Rs 90,000 crore in October before rising again to Rs 2.6 lakh crore in December.

To ensure that the rate cut smoothly transmits across the economy, the RBI has announced durable liquidity injections worth Rs 1 lakh crore through open market operations (OMOs) on 11 and 18 December.

The central bank is also addressing currency volatility. The rupee recently crossed the psychologically sensitive level of 90 per dollar amid strong dollar demand from importers, foreign investors and trading desks.

To ease pressure, the RBI has launched a USD/INR buy-sell swap of USD 5 billion for three years. This will inject around Rs 45,000 crore into the financial system.

SBI Research explains that such swaps typically reduce forward premiums, lower hedging costs for companies, and make overseas borrowing more attractive. They also help ease interbank funding pressures and strengthen market confidence.

The report points out that the offshore NDF market has been highly active, with one-month USD/INR forward premiums rising to their highest levels since May. These distortions show the elevated hedging cost for a weakening rupee. SBI Research expects the rupee to remain range-bound but still prone to volatility due to global events and shifting risk sentiment.

SBI Research also highlights a significant shift in the way companies are raising funds. While banks continue to meet most of the economy’s funding needs, the share of corporate bond issuances by non-financial firms has surged sharply to Rs 2.2 lakh crore between April and October, compared with just Rs 39,000 crore a year earlier. This shift eases pressure on banks and diversifies funding sources for the corporate sector.

The report concludes that the RBI has acted decisively to keep monetary conditions supportive in a challenging global environment. With inflation expected to fall further next year and growth fundamentals remaining strong, the central bank has left the door open for future rate decisions if needed.

SBI Research suggests that markets now need to remain calm and avoid overreaction, as India enters a phase of steady growth supported by lower interest rates, stable liquidity and a stronger policy framework.