The Monetary Policy Committee (MPC) is a body which is responsible to set India’s key interest rate and guide the country’s monetary policy. These decisions influence the cost of borrowing, the return on savings and the flow of credit in the economy (Indian Express, 2025). In 2025, the MPC met five times in April, June, August, October and earlier this month. The meetings in August and October concluded that there’s a need to maintain the policy repo rate at 5.50%, which was reduced in April from 6.25% to 6%, which was further reduced in June to 5.50%; this remained unchanged for the next five months until the MPC decided to reduce 25 basis points (bps) this month to 5.25% (LiveMint, 2025).
This decision reflected India’s performance in the second half of 2025. The inflation reportedly dropped to a record-low of about 0.25%. In the July-September quarter (Q2 of fiscal 2025-26), India’s real GDP grew by 8.2% year-on-year, significantly ahead of market estimates (PIB, 2025). It was underpinned by the robust April-June 2025 performance (Q1 of FY 2025-26), when the economy expanded by 7.8% year-on-year (Indian Express, 2025).
The strong GDP growth in Q2 was driven significantly by domestic consumption as India’s Private Consumption accounted for 62.5% of its Nominal GDP in Sept 2025, compared with a ratio of 60.3% in the previous quarter (KNN India, 2025). This further indicates how households were spending more on goods and services, which supported overall economic activity. India is leaning less on volatile global demand and more on internal consumption, investments and reforms, which may make it less vulnerable to global shocks for now. Inflation softened this year, driven largely by the easing of food price pressures across the economy. This fall was supported by stable food supplies, improved harvests and smoother supply chains, all of which reduced pressure on prices. Food inflation stood at around negative 5.02% in October, reflecting improved harvests, better supply chains and lower costs of essential items (PIB, 2025). Earlier in June, CPI inflation had already moderated to about 2.10%, showing that disinflation was well underway even before the October low (ET, 2025). Global conditions also helped, as softer prices of oil, metals and edible oils reduced import costs for firms and kept input costs stable (Reuters, 2025). These trends came during a period of strong economic activity. As a result, the RBI revised its inflation projection for FY26 to around 2%, creating space for the December 2025 rate cut (ET, 2025).
When interest rates are cut, it becomes cheaper for consumers and businesses to borrow money, which can lead to increased spending and investment, stimulating economic growth. This December cut therefore has benefits and drawbacks for different groups, depending on whether they are borrowers, savers or first-time home buyers-
The Positive Effect
Home loans EMI will fall as a 25 bps reduction directly lowers the cost of borrowing for repo-linked home loans, for a ₹50 lakh loan over 20 years, EMIs fall by ₹900 to ₹1,200 per month (TOI, 2025). For a ₹1 crore home loan over 15 years, the EMI drops by around ₹1,400 per month. Over a year, this gives households savings of ₹10,000 to ₹15,000 (LiveMint, 2025).
Cheaper credits for MSMEs and retail borrowers, as the lending rates fall by 25 bps, which lowers the cost of working capital and business loans. Education, vehicles and personal loans also get cheaper, which will improve affordability (LiveMint, 2025).
Increase in disposable income, as interest rates are cut in a low inflation economy, this gives higher purchasing power, with inflation at 0.25% in October 2025 and expected to stay close to 2% for FY26, everyday expenses grow much more slowly (ET, 2025). This leads to families allocating more money toward savings, consumption, healthcare, or education.
Cheaper for firms to borrow, this will help in expansion, and technology upgrades. This year, Gross Value Added (GVA) had already grown above 9.1% in Q2, and factory output grew 4.8% as of September 2025 (ET, 2025). Meanwhile, overall bank loan growth expanded about 11.4% year-on-year in November 2025 (ET, 2025). The cut can strengthen this trend in early 2026 by reducing capital costs, and encouraging firms to revive delayed investments. This also helps in job creation and boosting exports in sectors such as pharmaceuticals, electronics and machinery and helps India sustain its high growth momentum.
The Negative Effect
Reduced income on savings, lower deposit rates affect households that depend on monthly interest for expenses. This hits retirees more than working households, as they often hold a larger share of savings in FDs and safe deposits. 54% of household financial wealth in India is held in bank deposits, this shows how many people will be affected by this (ET, 2025). Official data shows the share of term deposits offering rates above 7% fell from 73% in March 2025 to 54% in September 2025, indicating a clear decline in returns even before the December cut. A 25 bps fall in deposit rates reduces annual interest income on a 10 lakh rupee FD by about 2,500 rupees, which matters for retirees who rely on fixed income (BS, 2025).
Returns on fixed deposits are lowered, banks had already reduced FD rates by 50 to 75 bps during 2025 due to earlier policy cuts. As of late 2025, many bank FDs in India now offer rates between roughly 6.00% to 7.40% per annum for standard depositors, according to aggregated tables of top banks’ rate sheets (ET, 2025). A person with 10 lakh in a FD at 7.00% per annum, interest income is ₹70,000 per year. If the interest rate drops by 50 bps (e.g. from 7.00% to 6.50%), the same deposit yields ₹65,000 which is a loss of ₹5,000 per year. If the rate drops by 100 bps (common over 2025 with multiple cuts), income falls to ₹60,000 per year, a ₹10,000 annual loss (MoneyControl, 2025).
MPC’s decision weakens rupee, as it increases the cost of essential imports for households. The cut added pressure on the currency, with the rupee falling past 90 per US dollar on 5th December, the day the cut was announced (Reuters, 2025). This year, the rupee has fallen by about 5 to 6% against the dollar, making it one of the weaker Asian currencies this year. Since India is heavily dependent on imports for fuels, edible oils, mobile phone and electronic components, any depreciation makes these items more expensive. For consumers, this will lead to an increase in price of petrol, cooking oil and electronics, which can offset the benefit of lower EMIs from the December cut and reduce overall purchasing power, especially for middle and lower income families.
The decision also raises India’s import bill, particularly for crude oil where India imports rose to 89.1% of its total requirement in March 2025. Even a 1% depreciation in the rupee can raise India’s annual oil import by thousands of crores. Higher import costs widen the current account deficit and thus increases the fiscal pressure. This also reduces space for public spending in areas like infrastructure, health and education. In 2026, the combination of a weak rupee and higher import cost could strain India’s macroeconomic stability.
With the December cut, most economists expect the RBI to remain cautious in 2026, but this will depend on how inflation, growth and the rupee behave in the coming months. In an optimistic outcome, inflation stays close to the RBI’s revised 2% projection for FY26 and growth holds near Fitch’s upgraded forecast of 7.4%, which creates space for one more 25 bps cut in the February 2026 meeting. The baseline view is that the central bank will pause to assess the full transmission of the 125 bps of easing delivered in 2025 while growth remains above 7% and inflation stays between 2 to 3%. The rupee has already weakened past 90 per dollar around the December meeting, and many analysts warn that currency pressure and higher import costs for fuel and edible oils could push headline inflation back towards 4%, which will limit the cut in 2026. This shows that while India enters 2026 with strong domestic fundamentals, the path of monetary policy will be shaped by the balance between low inflation at home and uncertainty in global markets.
References:
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