The Reserve Bank of India slashed its repo rate by 25 basis points to 5.25 per cent on Friday. This unanimous Monetary Policy Committee decision aims to fuel economic expansion amid record-low inflation. The move responds to robust GDP growth and a stabilising rupee, with implications for South Asian trade and remittances.
India’s central bank, the Reserve Bank of India, delivered a key rate reduction that eases borrowing costs for businesses and consumers. The policy shift marks the fourth cut in 2025, totalling 125 basis points. Governor Sanjay Malhotra announced the change after the three-day meeting ending December 5. This RBI repo rate cut aligns with falling inflation at 0.3 per cent in October and Q2 GDP surging to 8.2 per cent.
Indian Rupee RBI Decision Stabilises Currency
The Indian rupee RBI decision provided immediate relief to the forex market. Traders noted the rupee closed at 89.96 against the US dollar on Friday, rebounding from an intra-day low of 90.15. This recovery followed reports of RBI intervention, where state-owned banks bought dollars at elevated levels. The central bank’s actions tempered a bearish run driven by foreign outflows and delayed India-US trade talks.
Analysts link the RBI repo rate cut to moderated rupee pressure. “The MPC’s unanimous decision to reduce the repo rate to 5.25 per cent is a timely and decisive move,” said Umesh Revankar, Executive Vice Chairman at Shriram Finance. He highlighted the “Goldilocks” economic phase, with high growth and low inflation coexisting. This environment supports rupee stability, crucial for South Asia where India dominates regional trade.
Foreign exchange reserves stood at USD 686.2 billion as of December 5, covering over 11 months of imports. The RBI introduced a USD 5 billion buy-sell swap maturing in three years, alongside Rs 1 lakh crore in open market operations via bond purchases. These liquidity measures inject durable funds into the system, easing pressure on the rupee without aggressive depreciation.
In South Asia, the Indian rupee RBI decision ripples through bilateral ties. Pakistan’s exports to India, valued at USD 500 million annually, benefit from a steadier rupee, reducing hedging costs for exporters. Bangladesh, reliant on Indian remittances exceeding USD 4 billion yearly, sees lower transaction fees. The cut fosters regional investment flows, as lower Indian rates attract cross-border capital from Sri Lanka and Nepal.
USD INR Forecast December 2025 Points to Modest Rise
Market participants eye the USD INR forecast December 2025 with caution. Experts project the pair to climb modestly above 90 over coming months, despite the RBI repo rate cut. MUFG Research anticipates RBI pausing further easing, maintaining the neutral stance to balance growth and currency defence.
“The rupee may trade with a negative bias due to continued FII selling,” noted Anuj Choudhary of Mirae Asset Sharekhan. He forecasts a range of 89.65 to 90.50 in the near term, cushioned by a softer dollar index at 98.84. US jobs data disappointed, boosting expectations of a Federal Reserve cut in December, which could narrow yield gaps favouring the rupee.
Inflation dynamics underpin the USD INR forecast December 2025. Headline CPI eased to 1.7 per cent in Q2 FY26, dipping below the 2 per cent lower tolerance band for the first time. October’s 0.3 per cent print stemmed from food price corrections and subdued core pressures. RBI projects CPI at 2.0 per cent for FY26, with headline and core below 4 per cent through H1 FY27.
Global factors add volatility. Advanced economies face above-target inflation, while emerging markets like India contain pressures. Crude oil prices, softer due to ample supply, aid import bills. Yet, US treasury yield swings and trade uncertainties persist. For South Asia, a rupee above 90 could inflate import costs in Pakistan, where PKR 1 equals roughly INR 0.30, straining energy purchases.
The RBI repo rate cut complements these trends. By lowering the standing deposit facility to 5.00 per cent and marginal standing facility to 5.50 per cent, the bank signals ample liquidity. This setup supports Credit growth, with non-food bank lending up 15 per cent year-on-year.
RBI Policy Highlights Focus on Balanced Expansion
RBI policy highlights emphasise sustainable growth. Real GDP expanded 8.2 per cent in Q2 FY26, the highest in six quarters, driven by industrial and services sectors. Real GVA grew 8.1 per cent, bolstered by GST rationalisation, income tax reforms, and front-loaded government capex.
Governor Malhotra described the economy as entering a “rare Goldilocks period.” Festival demand boosted consumption, with rural strength and urban recovery evident. Agriculture thrived on solid kharif and rabi outputs, while manufacturing held steady. External balances showed resilience, with remittances and FDI offsetting export moderation.
RBI policy highlights include upward revisions. FY26 GDP now pegs at 7.3 per cent, up from prior estimates, reflecting resilient domestic demand amid global headwinds. Investment activity remains healthy, aided by private sector inflows.
Liquidity infusion forms a core RBI policy highlight. The USD 5 billion swap, set for December 16, and Rs 1 lakh crore OMO in two tranches (December 11 and 18) address systemic needs. These steps reinforce the repo rate adjustment, ensuring transmission to lending rates.
In the South Asian context, RBI policy highlights matter for integration. India’s growth trajectory, now at 7.3 per cent, outpaces regional peers like Pakistan’s 2.5 per cent and Bangladesh’s 6.0 per cent. Enhanced liquidity could spur SAARC trade, currently at USD 30 billion, by lowering financing barriers.
Challenges linger. Core inflation softened marginally but requires monitoring. Excluding precious metals, underlying pressures weaken, yet global divergences pose risks. RBI vows vigilance on food volatility and supply shocks.
Background: Evolution of RBI’s Easing Cycle
The RBI repo rate cut caps a year of monetary easing. Starting February 2025 with a 25 basis point reduction, followed by April’s 25 bps and June’s 50 bps, the cycle totals 125 bps. This responds to inflation breaching the lower 2 per cent band repeatedly.
Prior meetings held rates steady at 5.5 per cent in October and August, awaiting data clarity. The December pivot reflects Q2’s 8.2 per cent growth and October’s 0.3 per cent inflation, creating space for stimulus.
Historically, such cuts have spurred Credit offtake. Post-2024 easing, housing loans rose 12 per cent, and MSME funding 18 per cent. Similar patterns could emerge, benefiting South Asian supply chains linked to Indian manufacturing.
What’s Next: Monitoring Transmission and Global Cues
Banks now face pressure to pass on the RBI repo rate cut benefits. Lending rates may dip 20-30 basis points in weeks, per industry estimates. Watch Q3 GDP data in January for confirmation of momentum.
The USD INR forecast December 2025 hinges on Fed actions. A US rate trim could stabilise the pair below 90. RBI’s forex interventions remain ready, with reserves ample.
For South Asia, the Indian rupee RBI decision sets a template. Neighbours may eye similar easing, fostering regional monetary coordination. Stability here underpins USD 100 billion in intra-SAARC flows.
This RBI repo rate cut positions India for sustained expansion, balancing inflation control with growth imperatives.
Published in SouthAsianDesk, December 6th, 2025
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