RBI’s policy review delivers Goldilocks economics—and lower loan rates

Inflation had fallen sharply to 0.25% in October 2025, strengthening the case for a reduction in the policy repo rate from 5.5%. But equally strong was the opposing argument: the rupee had touched a record low beyond 90 against the US dollar, and a cut risked weakening the currency further.

In the end, the MPC not only cut the repo rate by 25 basis points but did so unanimously—remarkable given how split economists were ahead of the review. Alongside the rate decision, the RBI updated its macro projections.

With inflation trending significantly lower, the central bank reduced its CPI forecast for 2025–26 to 2%, down from 2.6% in the October review. Earlier in April, inflation for the year was projected at 4%, implying that the actual outcome may be half of what was expected at the start of the year.

On the growth front, the RBI raised its GDP estimate for 2025–26 to 7.3%, up from 6.8% projected in October and 6.5% in the April review. A strong growth outlook paired with exceptionally low inflation creates a Goldilocks scenario: an economy expanding at 7.3% while inflation stays benign at around 2%.

Liquidity boost

Another measure taken in this policy review is infusion of liquidity in the banking system.

The RBI announced open market operations (OMOs) to purchase government securities worth ₹1 lakh crore and USD–INR buy–sell swaps adding approximately ₹45,000 crore—infusing nearly ₹1.5 lakh crore into the system in December 2025.

The relevance of this is centered on the transmission of the RBI's rate cut action onto the ground, specifically banking deposits and lending rates. When the banking system has surplus liquidity, it becomes conducive for banks to transmit rate cuts effectively.

Prior to today's decision, the RBI had reduced the repo rate by 1 percentage point. Against this reduction, term deposit rates on fresh deposits have eased by 105 basis points (1.05%), whereas lending rates on fresh deposits have eased by only 69 basis points. Adequate transmission onto the ground is what makes RBI rate cuts more fruitful.

What RBI’s cut means for you

Subsequent to the latest rate reduction of 25 basis points, your loan rates would become cheaper. The exact timing or extent of easing depends on whether you have taken a fixed rate loan or a floating rate loan.

Floating rate loans, as per regulation, are benchmarked to an external benchmark—such as the RBI repo rate or the 3-month maturity Treasury Bill yield—which is not controlled by the bank. If you have taken, or are about to take, a home loan or a personal loan, this is positive news.

In the context of your investment portfolio, the impact is also positive. Equity markets favour lower interest rates, as they reduce the cost of money. With money becoming easier, more funds can potentially enter the equity market.

For industries and businesses, money is one of the factors of production; cheaper rates mean they are better placed to invest in their business. Given the buoyant GDP growth, there should be an inducement for increased investment.

For the bond market, this is also a positive, as interest rates and bond prices move inversely. With lower interest rates, your existing investments in bonds and bond funds are now priced higher. However, the rally in the bond market, by virtue of today’s rate cut, would be limited, as we are likely at or near the end of the current rate cut cycle, and markets are forward-looking.

For an investment hack, note that investments in debt mutual funds are typically taxable at your marginal slab rate, which can be 30% plus surcharge and cess for many investors. Fund of Funds (FoF), however, over a holding period of 2 years, are taxable at 12.5% plus surcharge and cess. You may invest in a debt-oriented FoF for two years or more to enjoy tax efficiency in the debt component of your portfolio.

Joydeep Sen is a corporate trainer (financial markets) and author