RBI cuts rate to stave off US tariff impact

Mumbai: Home, auto and other loans are likely to cost less as the Reserve Bank of India (RBI) on Friday cut key benchmark interest rate for the first time in six months and vowed to provide Rs1 lakh crore liquidity boost to banking sector to support a “goldilocks” economy in the face of high US tariffs.

The six-member monetary policy committee, led by RBI Governor Sanjay Malhotra, voted unanimously to lower the repurchase or repo rate by 25 basis points to 5.25 per cent and retained a neutral stance, which gave room for further rate cuts.

The step is being seen as lending support to the economy that has been hit hard by the steep 50 per cent tariff US President Donald Trump slapped on Indian goods.

The move had already led to a dip in export and widening of trade deficit as well as pushed rupee to a record low.

RBI’s move will supplement government efforts in lending support to the economy in form of biggest GST reforms, relaxing labour rules and easing financial sector regulations.

A cut in the repo rate will lead to lower borrowing costs for individuals as well as corporate because it reduces the interest banks pay to borrow from the RBI. With cheaper funding, banks can lower lending rates such as MCLR and base rates, making home, auto, and business loans more affordable.

This reduces EMIs, encourages consumers and businesses to borrow more, and supports economic activity.

The RBI also reiterated its commitment to providing adequate liquidity to the banking system as it announced intent to conduct open market purchases of government bonds up to Rs1 lakh crore in two tranches of Rs50,000 crore each on 11th and 18th December and a buy-sell swap of $5 billion on 16th December.

Both measures will add durable liquidity at a time when banks face seasonal liquidity pressures.

This is the fourth rate cut by the central bank since February 2025, taking the total to 125 basis points. It held rates in August and October bimonthly monetary policy meetings. “Inflation at a benign 2.2 per cent and growth at 8.0 per cent in H1:2025-26 (April-September of 2025-26 fiscal year) present a rare goldilocks period,” Malhotra said announcing the monetary policy decisions.

The RBI lowered its inflation forecast for the fiscal year through March to 2 per cent from 2.6 per cent, while raising its GDP growth projection to 7.3 per cent, from the previous estimate of 6.8 per cent. While economic growth has remained strong, India’s economy has since October experienced rapid disinflation leading to a breach of the central bank’s lower threshold of tolerance, he said.

“The growth-inflation balance, especially the benign inflation outlook on both headline and core, continues to provide the policy space to support the growth momentum,” he said.

“Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience and is poised to register high growth. The headroom provided by the inflation outlook has allowed us to remain growth supportive.”

He went on to add that RBI will continue to meet the productive requirements of the economy in a proactive manner while ensuring macroeconomic stability.

Indian exports have plunged after US President Donald Trump slapped a 50 per cent tariff on goods from the country. RBI will conduct open market operations of Rs1 lakh crore to buy bonds this month, and another $5 billion in forex swaps to add liquidity to the banking system and speed up transmission of lower rates.

Commenting on the RBI decisions, Crisil chief economist Dharmakirti Joshi said the rate cuts and the accompanying liquidity-enhancing measures underscore the growth-supportive nature of this policy decision.

“This fiscal, economic data has surprised on both growth and inflation fronts, creating elbow room for the rate cut. Real gross domestic product (GDP) growth has surpassed expectations, reaching 8 per cent in the first half of this fiscal, while retail inflation has decelerated sharply,” he said.