RBI Cuts Repo Rate — Goldilocks Phase, Monetary Policy, Inflation & RBI

What was the repo rate cut announced by the RBI in December 2025?

The RBI cut the repo rate by 25 basis points, bringing it down to 5.25%.

What was the total repo-rate reduction by the RBI during 2025?

The RBI reduced the repo rate by a total of 125 basis points during 2025.

Why did the RBI reduce the repo rate in December 2025?

The rate cut was supported by sustained disinflation, robust economic growth and external risks/global trade headwinds, creating room for monetary easing.

What is the repo rate?

The repo rate is the rate at which the RBI lends money to commercial banks, generally against government securities, under the repurchase agreement mechanism.

What does the term 'repo' stand for?

Repo stands for 'Repurchase Option' or 'Repurchase Agreement'.

How does an increase in the repo rate affect the economy?

A higher repo rate makes borrowing costlier for banks, which raises lending rates for consumers and businesses, reduces borrowing and spending, and helps control inflation.

How does a decrease in the repo rate affect the economy?

A lower repo rate makes borrowing cheaper for banks, encourages lending, investment and consumption, and can stimulate economic growth.

Why can a higher repo rate help control inflation?

Higher borrowing costs reduce excessive demand, money circulation and spending, thereby helping moderate inflationary pressures.

Why can a lower repo rate support economic growth?

Cheaper credit encourages businesses to borrow and invest and consumers to spend, increasing economic activity and supporting growth.

What were the major economic implications of the December 2025 repo-rate cut?

The cut was expected to boost lending, consumption, investment and capital expenditure, while supporting demand and economic growth.

How can a repo-rate cut affect the Indian rupee?

Lower interest rates can weaken the rupee by reducing the relative attractiveness of Indian financial assets, potentially making exports more competitive but imports costlier.

How can a repo-rate cut affect savings?

Lower interest rates can reduce deposit returns, potentially encouraging households to shift from deposits toward consumption or other investments.

What is the 'Goldilocks Phase' in an economy?

A Goldilocks economy is an economic condition that is 'just right'—not too hot with excessive inflation and not too cold with weak growth, but characterised by balanced growth and low inflation.

Why was India described as being in a Goldilocks phase in December 2025?

India was described as being in a Goldilocks phase because growth remained strong while inflation had fallen sharply, creating room for monetary-policy easing without major inflationary pressure.

What was India's real GDP growth mentioned for Q2 FY2025-26?

India's real GDP growth was mentioned as 8.2% for Q2 FY2025-26.

What was India's inflation rate in October 2025 according to the chapter?

India's inflation rate was 0.3% in October 2025, described as being below the lower end of the RBI's inflation target band.

What is India's flexible Inflation-Targeting Framework?

India's flexible Inflation-Targeting Framework requires the RBI to maintain inflation around a predetermined target while also considering economic growth.

What is India's inflation target under the Flexible Inflation-Targeting Framework?

The inflation target is 4%, with a tolerance band of ±2%, meaning the permissible range is 2% to 6%.

Which committee recommended inflation targeting for India?

The Urjit Patel Committee recommended formalising inflation targeting in India.

When did India adopt the Flexible Inflation-Targeting Framework?

India adopted the Flexible Inflation-Targeting Framework in 2016.

What is the Monetary Policy Committee (MPC)?

The MPC is a statutory committee responsible for determining the policy rate required to achieve the inflation target while keeping economic considerations in view.

Under which law is the Monetary Policy Committee constituted?

The MPC is constituted under the amended Reserve Bank of India Act, 1934, specifically under Section 45ZB.

How many members does the Monetary Policy Committee have?

The Monetary Policy Committee has six members.

How are the six MPC members divided between the RBI and the Central Government?

Three members are from the RBI and three are appointed by the Central Government.

Who is the ex-officio Chairperson of the MPC?

The RBI Governor is the ex-officio Chairperson of the Monetary Policy Committee.

Who is the RBI member of the MPC apart from the Governor and Deputy Governor?

One RBI officer nominated by the Central Board of the RBI is an MPC member, in addition to the RBI Governor and the Deputy Governor in charge of monetary policy.

Who appoints the three external members of the MPC?

The Central Government appoints the three MPC members who are not from the RBI.

How frequently must the Monetary Policy Committee meet?

The MPC must meet at least four times a year.

What is the quorum for an MPC meeting?

The quorum is four members, including the RBI Governor or, in the Governor's absence, the Deputy Governor who is a member of the MPC.

How are decisions of the MPC generally taken?

MPC decisions are taken by a majority of votes of the members present and voting.

What happens if there is a tie in an MPC vote?

If there is an equality of votes, the RBI Governor has a casting vote.

What is the Monetary Policy Report?

The RBI publishes the Monetary Policy Report once every six months, explaining the sources of inflation and providing inflation forecasts for roughly the coming 6–18 months.

What is inflation?

Inflation is a sustained increase in the general price level of goods and services in an economy over time, reducing the purchasing power of money.

What is headline inflation?

Headline inflation measures the overall change in prices, including volatile components such as food and fuel.

What is core inflation?

Core inflation measures inflation after excluding volatile food and fuel components.

What is the Consumer Price Index (CPI)?

CPI measures changes in the prices of goods and services consumed by households, particularly reflecting inflation in the retail market.

What is the base year of India's CPI mentioned in the chapter?

The base year for CPI is 2012.

Which institution releases India's CPI?

The National Statistical Office (NSO) releases the Consumer Price Index.

What is the Consumer Food Price Index (CFPI)?

CFPI measures changes in the retail prices of food products and therefore focuses specifically on food-price inflation.

What is the Wholesale Price Index (WPI)?

WPI measures changes in wholesale prices of goods and is primarily used to track inflation at the wholesale level.

Who releases the Wholesale Price Index in India?

The Office of the Economic Adviser under the Ministry of Commerce and Industry releases the WPI.

What is the base year of WPI?

The base year of WPI is 2011–12.

What is the GDP Deflator?

The GDP Deflator is an implicit price index that compares the value of an economy's annual production at current prices with its value at base-year prices, capturing price changes across domestically produced goods and services.

How does WPI differ from CPI?

WPI measures wholesale prices and includes capital goods, while CPI measures retail prices faced by consumers and does not include capital goods.

How does the GDP Deflator differ from CPI?

The GDP Deflator covers domestically produced final goods and services and includes capital goods, whereas CPI measures the consumer basket and excludes capital goods.

What is the Cash Reserve Ratio (CRR)?

CRR is the proportion of a bank's deposits that it is required to maintain as cash reserves with the RBI.

What is the Statutory Liquidity Ratio (SLR)?

SLR is the minimum proportion of a commercial bank's deposits that must be maintained in liquid assets such as cash, gold or approved government securities.

What is the Marginal Standing Facility (MSF)?

MSF is a facility through which banks can borrow overnight funds from the RBI at a rate higher than the repo rate, subject to prescribed conditions.

What are Open Market Operations (OMOs)?

Open Market Operations are the RBI's purchase or sale of government securities to inject or absorb durable liquidity from the banking system.

What is the Bank Rate?

The Bank Rate is a long-term policy-related rate at which the RBI lends to other banks; changes in it can influence borrowing and lending conditions.

What are the major functions of the Reserve Bank of India?

The RBI acts as monetary authority, regulator and supervisor of the banking system, issuer of currency, manager of foreign exchange, banker to banks, and banker to the government.

When was the Reserve Bank of India established and when was it nationalised?

The RBI was established in 1935 and was nationalised in 1949.

Who was the first Governor of the Reserve Bank of India?

Sir Osborne Smith was the first Governor of the RBI.

Who was the first Indian Governor of the RBI?

C.D. Deshmukh was the first Indian Governor of the RBI.

What is the difference between monetary policy and fiscal policy?

Monetary policy is managed by the RBI and primarily deals with money supply, interest rates and liquidity, whereas fiscal policy is managed by the government and concerns taxation and public expenditure.