MUMBAI: The Reserve Bank of India (RBI) decided on Tuesday to hold its key repo rate at 5.50 per cent, answering who, what, when, where, why and how in a move that keeps the door open for an RBI December rate cut. The Monetary Policy Committee (MPC) announced the decision at 10:00 AM IST following its meeting from September 29 to October 1, 2025. This pause allows assessment of recent fiscal and monetary impacts on the economy.
This story matters across South Asia because India’s central bank policy shapes regional financial stability. A potential RBI December rate cut could lower borrowing costs, spur investment and enhance trade ties with neighbours like Bangladesh, Pakistan and Sri Lanka. Remittances from Indian workers in the Gulf, vital for economies such as Nepal and Bhutan, may benefit from stronger rupee flows if growth accelerates.
RBI Holds Rates, Leaves Room for December Cut 2025
The RBI’s unanimous decision to maintain the repo rate at 5.50 per cent reflects caution amid evolving global uncertainties. The standing deposit facility rate stays at 5.25 per cent, while the marginal standing facility rate and bank rate remain at 5.75 per cent. The MPC retained its neutral policy stance, balancing inflation control with growth support.
RBI Governor Sanjay Malhotra explained the rationale during his post-policy briefing. “The current macroeconomic conditions and the outlook have opened up policy space for further supporting growth,” he stated. He added that the MPC noted the impact of front-loaded monetary actions and recent fiscal measures, including goods and services tax (GST) rationalisation, is still unfolding.
This RBI holds rates leaves room December cut 2025 approach addresses trade headwinds, particularly US tariffs of up to 50 per cent on Indian exports like textiles and chemicals. These tariffs threaten external demand, prompting the central bank to monitor developments closely.
Inflation Outlook Supports RBI December Rate Cut Prospects
Headline inflation has moderated sharply, creating space for an RBI December rate cut. The RBI revised its consumer price index (CPI) inflation projection for FY25-26 downwards to 2.6 per cent from 3.1 per cent in August. August CPI stood at 2.07 per cent, within the 2-6 per cent target band.
Food prices drove the decline, aided by a favourable monsoon and GST rate cuts on consumer goods. Core inflation, excluding food and fuel, remains contained at around 4.2 per cent. The MPC projects Q4:2025-26 inflation aligned with the target, despite base effects.
Governor Malhotra highlighted this benign outlook. “The overall inflation outlook has turned even more benign in the last few months, due to a sharp decline in food prices and the rationalisation of GST rates,” he said. Lower inflation eases pressure on households and businesses, potentially paving the way for rate easing.
In South Asia, subdued Indian inflation could stabilise import costs for neighbours reliant on Indian goods. Countries like Sri Lanka, recovering from economic crisis, stand to gain from predictable pricing in bilateral trade.
Growth Projections Bolster Case for RBI December Rate Cut
India’s economy showed resilience with 7.8 per cent GDP growth in the April-June quarter of 2025-26, surpassing expectations. Gross value added rose 7.6 per cent. The RBI upgraded its full-year GDP forecast to 6.8 per cent from 6.5 per cent.
Domestic drivers, including robust kharif sowing and adequate reservoir levels, underpin this momentum. High-frequency indicators point to sustained activity in Q2:2025-26. However, growth may moderate in the second half due to external factors.
Governor Malhotra noted, “Economic activity has remained resilient. However, ongoing tariff and trade policy uncertainties will impact external demand.” The MPC expects GST reforms to offset some tariff effects by boosting consumption.
For South Asia, higher Indian growth forecasts signal opportunities in cross-border supply chains. Bangladesh’s garment sector, intertwined with Indian textiles, could see indirect benefits if an RBI December rate cut stimulates regional demand.
Regulatory Measures to Aid Lending
The RBI announced steps to enhance bank lending. It eased norms for banks to lend to non-banking financial companies (NBFCs) in infrastructure, reducing risk weights. This aims to channel more funds to priority sectors.
Additionally, the central bank promoted rupee internationalisation by allowing rupee balances for overseas transactions and simplifying foreign currency borrowing for Indian firms. These moves support export competitiveness amid tariff pressures.
Background: RBI’s 2025 Policy Path
The RBI entered 2025 with aggressive easing, cutting the repo rate by 100 basis points in the first half to 5.50 per cent. It paused in August to evaluate transmission. Tuesday’s decision marks the second consecutive hold, as the MPC chaired by Governor Malhotra and including members like Dr. Nagesh Kumar and Prof. Ram Singh opts for data dependency.
Two MPC members favoured shifting to an accommodative stance, per the official resolution. This internal debate underscores the tension between growth aspirations and caution.
Historically, RBI policies influence South Asian markets. The 2022 tightening cycle raised borrowing costs across the region, affecting stock indices in Colombo and Dhaka. A prospective RBI December rate cut could reverse this, fostering liquidity spillovers.
What’s Next: Path to RBI December Rate Cut
Analysts anticipate a 25 basis point cut in December if inflation stays low and growth moderates as projected. The MPC will reconvene on December 3-5, 2025, to reassess.
Governor Malhotra emphasised prudence. “The MPC, therefore, considered it prudent to wait for the impact of policy actions to play out and greater clarity to emerge before charting the next course of action.” Global factors, including US Federal Reserve moves, will weigh heavily.
In South Asia, stakeholders watch closely. A timely RBI December rate cut could invigorate intra-regional trade under frameworks like SAARC, countering global headwinds.
The RBI’s balanced approach positions India for sustainable recovery, with the RBI December rate cut emerging as a key lever to sustain momentum.
Published in SouthAsianDesk, October 1st, 2025
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