RBI cuts repo rate to 5.25%, boost investment and funding

RBI cuts repo rate to 5.25%, boost investment and funding

RBI’s December 2025 move to cut the repo rate to 5.25% is a classic pro-growth, liquidity-boosting step, enabled by ultra-low inflation and still-robust GDP growth. This decision is set to gradually lower borrowing costs, support investment and capex, and ease funding conditions across banks, NBFCs, and capital markets.​

What RBI has done

• The Monetary Policy Committee unanimously cut the policy repo rate by 25 bps to 5.25% in its 3–5 December 2025 meeting, with effect from 5 December.​

• The Standing Deposit Facility rate is now 5.00%, while the Marginal Standing Facility and Bank Rate stand at 5.50%, with the stance retained as “neutral” to keep flexibility for future moves.​

Macro backdrop: why the cut now

• Headline CPI inflation has collapsed to around 0.25% year-on-year in October 2025, the lowest in the current CPI series and far below the RBI’s 4% target band (and even below the 2% lower tolerance).​

• At the same time, real GDP growth has remained strong, with RBI citing Q2 FY26 real GDP growth above 8%, supported by domestic demand, industrial and services strength, and government capex.​

Transmission to lending and funding costs

• With the repo rate now 100 bps lower than at the start of FY26, banks’ marginal cost of funds and external benchmark-linked lending rates are poised to decline further, making home, auto, and SME loans cheaper over the coming quarters.​

• RBI is complementing the rate cut with liquidity measures, including plans for government security purchases via OMOs of about ₹1 lakh crore and a USD 5 billion buy–sell swap, which together inject durable liquidity and ease funding stress in money and bond markets.​

Impact on investment and capex cycle

• Lower policy rates and ample liquidity reduce project financing costs, improving the internal rate of return (IRR) for long-gestation investments in infrastructure, manufacturing, real estate, and renewables, and encouraging fresh capex proposals.​

• Healthy corporate and bank balance sheets, cited by RBI as a support factor, mean more entities can actually translate better funding conditions into new investments rather than only deleveraging.​

Sectoral implications for markets

Segment / Asset	Likely Directional Impact	Key Driver
Banks & NBFCs	Medium-term positive, near-term mixed	Cheaper funding and higher credit growth vs. some NIM pressure. ​
Realty & Housing Finance	Positive	Lower home loan rates, improved affordability, stronger residential launches. ​
Auto & Consumer Durables	Positive	Cheaper vehicle and consumer loans, rate-sensitive discretionary demand. ​
Infrastructure & Industrial Capex	Positive	Lower project finance cost plus government capex push. ​
Long-duration Bonds & G-Secs	Positive	Rate cut and RBI OMOs support bond prices and compress yields. ​
Fixed Deposits & Small Savings	Mild negative	Downward pressure on deposit rates as policy rates fall. ​

What it means for borrowers and savers

• For households and SMEs, EBLR/MCLR-linked loans should progressively reset lower, reducing EMIs or allowing top-up borrowing, although banks may stagger full transmission depending on deposit dynamics.​

• For savers, the downside is a likely softening of new fixed deposit and loan-linked savings rates, pushing long-term investors further toward debt funds, balanced products, and quality equities for real returns.​

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Banks, NBFCs, real estate, autos and other loan-driven consumption plays are the biggest beneficiaries of the repo cut, with infrastructure and capex-heavy industrials also gaining from cheaper project finance over time. Rate-insensitive defensives like FMCG or IT see more indirect sentiment and valuation support than direct funding cost relief.​

Top direct beneficiaries

• Real estate & housing finance: Lower home loan rates improve affordability, push residential sales and launches, and support commercial property demand; Nifty Realty outperformed immediately after the policy, with developers like DLF and Prestige rallying. Housing finance companies gain from volume growth as mortgage demand responds quickly to rate moves.​

• Auto & auto ancillaries: Cheaper vehicle loans support PV, 2W and CV demand, with Nifty Auto index moving higher post-policy and brokerages flagging autos as classic “rate-sensitive” winners. Ancillaries benefit through higher OEM volumes and replacement demand.​

Financials and lending ecosystem

• NBFCs & consumer financiers: Lower policy rates and RBI’s liquidity support reduce wholesale funding costs for NBFCs, improving spreads or enabling more competitive lending in retail and SME segments. Players in consumer finance, gold loans and vehicle finance saw up to 2% intraday gains as markets priced in better credit growth and treasury gains.​

• Banks: Banks benefit from stronger credit demand and mark-to-market gains on bond portfolios, even as there is some concern about NIM compression as lending rates reset faster than deposit costs. Public and private bank indices moved up after the decision, reflecting the net positive tilt from growth and treasury gains.​

Capex, SMEs and rate-sensitive consumption

• Infrastructure, construction and industrials: Lower borrowing costs and improved liquidity favour long-gestation projects and EPC players, especially where order books are tied to government and private capex. Construction, building materials and capital goods can see a second-order benefit as funding constraints ease and project IRRs improve.​

• SMEs, agriculture and urban consumption: MSME and working-capital borrowers benefit from cheaper credit, supporting inventory, hiring and capacity use, while lower EMIs free disposable income for urban consumers, helping discretionary sectors like durables and organised retail.​