RBIs December 2025 Repo Rate Cut: 5 Amazing Market Impacts

This analysis is for traders, investors, portfolio managers, and financial advisors who need to understand how these policy changes will reshape market dynamics and investment strategies. We’ll break down the immediate market response across asset classes and examine how different sectors are positioning themselves for the new interest rate environment.

You’ll discover how the RBI’s massive liquidity injection through ₹1 lakh crore in open market operations is already moving bond yields and why the accompanying $5 billion forex swap signals deeper currency management strategies. We’ll also explore which sectors are seeing the biggest gains and how the dramatic revision in economic growth forecasts from 6.8% to 7.3% is changing investment calculations across the board.

The Monetary Policy Committee (MPC) unanimously voted to reduce the repo rate reduction 25 basis points from 5.50% to 5.25% in December 2025, marking a significant shift in RBI monetary policy 2025. This decisive action represents the fourth rate cut in the current easing cycle, bringing the total reduction to 125 basis points for the year, demonstrating the central bank’s commitment to supporting economic growth.

Despite these dovish actions, the MPC maintained a ‘Neutral’ policy stance to support robust economic momentum while carefully balancing growth and inflation concerns. The RBI policy changes also updated other key policy rates, with the Standing Deposit Facility (SDF) rate now at 5.00% and the Marginal Standing Facility (MSF) rate at 5.50%, creating a comprehensive framework for enhanced liquidity management.

Massive Liquidity Injection Through Open Market Operations: RBIs December 2025 Repo Rate Cut

The RBI’s liquidity injection strategy centers on aggressive Open Market Operations, with government bond purchases worth ₹1 lakh crore scheduled in two equal tranches of ₹50,000 crore each. These open market operations are strategically planned for December 11 and December 18, 2025, ensuring systematic liquidity infusion throughout the month.

$5 billion USD/INR buy-sell swap with three-year tenor

Complementing the bond purchases, the RBI has announced a substantial USD/INR buy-sell swap auction worth $5 billion with a three-year tenor, scheduled for December 16, 2025. Combined with the OMO measures, these operations represent a comprehensive liquidity injection approach, with total infusion expected to reach ₹1.45 lakh crore in December alone. This strategic timing ensures smooth transmission of the repo rate reduction, supporting growth while lowering funding costs and improving credit transmission across the economy.

The RBI delivered an unprecedented boost to economic growth forecast revision expectations, elevating India’s FY26 GDP growth projection from 6.8% to an impressive 7.3%. This substantial upward revision reflects the central bank’s confidence in the economy’s resilience and growth momentum following the December 2025 repo rate reduction 25 basis points.

CPI Inflation Forecast Slashed to 2% from 2.6% for FY26

Simultaneously, the inflation projection RBI underwent dramatic downward revision, with CPI inflation forecasts plummeting from 2.6% to just 2% for FY26. This represents the lower bound of RBI’s inflation tolerance range, providing significant policy space. The quarterly GDP growth projections were also enhanced, with Q3FY26 increasing to 7% from 6.4% and Q4FY26 rising to 6.5% from 6.2%, while long-term inflation expectations remain comfortably within the RBI’s target zone.

Immediate Market Response and Sectoral Benefits: RBIs December 2025 Repo Rate Cut

Rate-sensitive sectors like Banking and NBFCs are positioned to gain significantly from the RBI rate cut December 2025, benefiting from improved credit transmission mechanisms and stronger earnings visibility. The real estate market is set to receive a substantial boost as lower interest rates enhance homebuyer affordability and reduce borrowing costs for developers, particularly benefiting mid-income and premium property categories.

Bond yields declining with equity markets rallying

Following the repo rate reduction 25 basis points, Indian government bond yields declined notably, with the 10-year benchmark yield dropping to 6.47% from 6.51% after OMO announcements. Equity markets responded positively to the market impact rate cut, with the Sensex trading 0.37% higher at 85,578.71 and the Nifty 50 gaining 0.38% to reach 26,132.75 after the policy announcement.

Currency Management and External Sector Positioning: RBIs December 2025 Repo Rate Cut

Rupee Stabilization Without Exchange Rate Targeting

The RBI maintains a clear stance on currency management external sector policy, allowing market forces to determine rupee pricing without targeting specific exchange rate levels or bands. This approach supports the central bank’s commitment to market-driven currency valuation while maintaining intervention capabilities when necessary.

Strategic Forex Interventions and Strong Fundamentals

The RBI monetary policy 2025 framework includes a forex intervention strategy specifically designed to reduce abnormal or excessive volatility through India’s managed float system. With external sector fundamentals remaining robust, including sufficient reserves and a manageable current account deficit expected around 1%, enhanced capital flow expectations persist despite global uncertainties. Net FDI inflows have surged dramatically by 127.6% to $7.7 billion in H1FY26, reinforcing India’s attractive investment landscape.

The market’s immediate positive response across equities, bonds, and currency markets validates the RBI’s strategic approach to balancing growth imperatives with external sector stability. With sectors like real estate, banking, and consumer goods poised to benefit from improved credit transmission and lower borrowing costs, the policy creates a foundation for sustained economic momentum. As Governor Malhotra emphasized, the focus now shifts to ensuring effective policy transmission while maintaining vigilance over evolving macroeconomic conditions. For investors and businesses alike, this dovish pivot offers a clear signal to capitalize on India’s strengthening fundamentals in an increasingly uncertain global environment.

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