RBI rate cut to bolster consumption, growth: Bankers

December 5, 2025

New Delhi: The Reserve Bank of India’s (RBI) latest decision to cut the repo rate has been welcomed by leading bankers and economists, who believe the move uses the “extra space” created by low inflation to boost spending and support India’s growth cycle.

The central bank’s step is seen as a timely push at a moment when the economy is doing well but still faces global uncertainties.

The Monetary Policy Committee (MPC) on Friday announced a 25-basis-point cut, bringing the repo rate down to 5.25 per cent from 5.5 per cent. According to experts, this cut comes at the right time because inflation has remained low for several months and overall economic activity has been strong.

Growth outlook and inflation trends

Sakshi Gupta, Principal Economist at HDFC Bank, said the rate cut was fully in line with expectations, especially since India’s GDP growth crossed 8 per cent in Q2 FY26. She noted that while the domestic economy is performing well, external risks remain, particularly in exports due to weak demand in major global markets. This, she said, justified a supportive monetary stance.

Gupta added that although consumption improved during the festive period, it is not clear whether this higher spending will continue in the coming months. For this reason, the RBI’s rate cut provides a counter-cyclical boost—meaning it helps support the economy at a time when demand may soften.

Sharing the bank’s economic outlook, HDFC analysts expect GDP growth of 7.3 per cent in FY26 and 6.5 per cent in FY27. They also forecast inflation at 2 per cent in FY26 and 4 per cent in FY27. According to them, inflation will likely stay below 4 per cent until mid-next year, giving the RBI the flexibility to cut rates again if the economy needs further support.

However, Gupta cautioned that if India’s current growth momentum continues and if the government finalises a major new trade deal soon, this may become the last rate cut in the current cycle.

Bankers highlight policy consistency and liquidity support

Rajiv Anand, Managing Director & CEO of IndusInd Bank, agreed with the inflation forecast given by HDFC Bank. He said the RBI’s move reinforces the importance of maintaining a rules-based monetary policy, which increases trust and stability in the financial system.

Anand highlighted that the RBI’s decision to inject nearly Rs 1.5 trillion of durable liquidity—through a combination of bond purchases and foreign-exchange swaps—will help ensure smoother policy transmission. This means banks and markets will be able to reflect the rate cut more effectively in lending rates, especially in the sovereign bond market.

Lakshmanan V, Group President & Head of Treasury at Federal Bank, also praised the RBI’s balanced approach. He said the combination of a rate cut, long-dated swaps, and open market operations (OMOs) helps maintain the central bank’s promise of keeping liquidity comfortable. According to him, the move will also help maintain currency stability, avoiding sharp swings in the rupee.

He added that early market reactions have been positive across the board, showing confidence that the RBI’s decisions will support both financial stability and economic growth.

Repo rate cut and new swap arrangement

Alongside the rate cut, the RBI also announced a $5-billion dollar-rupee swap arrangement. This is expected to strengthen India’s foreign-exchange reserves, support the rupee, and provide additional liquidity to the banking system.

The MPC’s unanimous vote to reduce the repo rate is seen as a clear signal that the central bank wants to support the growth cycle while keeping inflation under control. With both inflation and global commodity prices remaining soft, the RBI currently has more room to take pro-growth measures.

Economists believe that if international conditions remain stable and domestic manufacturing continues to grow, India could maintain strong economic momentum in the coming quarters. For now, the latest rate cut is expected to lower borrowing costs, encourage investment, and help both businesses and consumers benefit from easier financial conditions.