The financial markets reacted sharply on Friday as the Reserve Bank of India (RBI) unveiled a 25 basis point repo rate cut, bringing the policy rate down to 5.25%. The Monetary Policy Committee (MPC), led by Governor Sanjay Malhotra, voted unanimously to ease the RBI policy rate, marking its most decisive move yet to sustain India’s growth momentum amid record-low inflation.
Within minutes of the RBI repo rate announcement, bank and realty stocks surged, signalling investor confidence in the central bank’s growth-first strategy. Traders noted that the repo rate cut was widely expected but the accompanying liquidity measures amplified market optimism.
Equity Markets Cheer RBI’s Growth-Focused Stand
Both the Nifty and Sensex opened higher following the policy update, with financial and infrastructure stocks leading gains. Analysts described the tone of the RBI as “supportive and forward-looking,” especially as Governor Malhotra highlighted a stronger-than-anticipated GDP trajectory.
The governor’s emphasis on India’s “rare goldilocks period” — 2.2% inflation paired with 8% growth — reassured traders that the central bank sees enough stability to promote lending and expansion through the MPC repo rate decision.
Market experts say rate-sensitive sectors such as banking, automobiles and real estate stand to benefit immediately. Lower borrowing costs could boost home sales, vehicle purchases and corporate expansion plans in the coming quarters.
Bond Yields Decline After OMO Purchase Announcement
Beyond the headline repo rate cut, the RBI also committed to injecting liquidity through:
- ₹1 lakh crore OMO bond purchases
- A $5 billion USD/INR 3-year swap
- Marginal Standing Facility (MSF) reduced to 5.5%
- Standing Deposit Facility (SDF) cut to 5%
Bond yields dropped in early trade as traders digested the RBI’s intent to create ample liquidity for banks to transmit the RBI policy rate quickly.
Dealers said the combination of a repo reduction and large-scale OMOs could lower short-term borrowing costs across the financial system and potentially spark a bond market rally.
Inflation Path Clears Way for Aggressive Policy Moves
Governor Sanjay Malhotra explained that inflation has not only softened but dropped below the RBI’s tolerance band — a first in India’s flexible inflation targeting regime. With October inflation at 0.3%, the MPC had sufficient comfort to announce the repo rate cut without risking an inflation spike.
The inflation outlook remains “balanced,” according to the RBI, with risks coming from global commodity prices and geopolitical tensions. However, domestic food inflation and core inflation remain subdued, strengthening the case for a pro-growth policy stance.
Growth Expectations Lifted Sharply
The RBI upgraded its GDP estimate for FY2025–26 to 7.3%, up from 6.8%. Festive spending, GST rationalisation, rising private consumption and a rebound in services were cited as key drivers.
The central bank, however, remained cautious about global headwinds:
- Divergent rate cycles across central banks
- AI-driven market volatility
- Trade disruptions
- Capital flow fluctuations
Still, compared to other emerging markets, India remains better placed to accelerate lending and investment, especially after the fresh RBI repo rate announcement.
Banking Sector Braces for Faster Transmission
Banks are expected to adjust lending rates over the coming weeks. Analysts predict:
- Home loan EMIs may reduce
- Auto loans may see minor rate cuts
- MSME loans could become cheaper
- Corporate borrowing may pick up by late Q1 2026
Experts noted that the RBI’s liquidity injection will ensure banks face no constraint while passing the repo rate cut benefits to consumers.
Investor Sentiment Turns Positive for 2026
Brokerages say the policy marks a strategic shift as India enters 2026 with robust economic indicators and weakening inflation pressures. The central bank’s neutral stance gives confidence that rate calibrations will remain flexible in the months ahead.
