RBI Monetary Policy explained: What 25 bps rate cut means for markets, rupee

The Reserve Bank of India’s (RBI) decision on December 5 to slice the repo rate by 25 basis points to 5.25 per cent sent a jolt of adrenaline through Dalal Street. While the benchmark Sensex staged a dramatic recovery, rising over 500 points from the day’s low to reverse early losses, the currency market told a far more volatile story.

The cumulative 125-basis-point reduction this calendar year comes against a complex backdrop: the rupee has breached the psychological 90-mark against the US dollar, hitting a record low, even as domestic inflation remains historically benign.

Growth over currency?

The Monetary Policy Committee’s (MPC) unanimous decision signals a clear preference for fueling the economic engine, despite the headwinds facing the local currency.

“The MPC decided to vote in favour of growth despite ongoing robust growth in the economy,” says V K Vijayakumar, Chief Investment Strategist at Geojit Investments Limited. He siad that the unanimity “reflects the consensus in the MPC that giving further boost to growth is a risk worth taking even in the context of a depreciating rupee.”

This sentiment is echoed by Aman Shah, Head of Research at Equirus Family Office, who views the move as “a strong signal toward growth support.” Shah pointed out that the decision aligns with expectations, given that CPI inflation stood at a subdued 0.25 per cent in October 2025. “The RBI’s dovish approach aimed at stimulating demand and injecting liquidity should further reinforce the growth outlook,” Shah added.

Sector watch: Banks, auto and MSMEs

While the broader market cheered, the implications for the banking sector are nuanced. Lower rates generally compress Net Interest Margins (NIMs).

“Banks will like the policy decision overall but are unlikely to respond very positively to the rate cut since their NIMs will come under pressure, and they will face difficulties in mobilising deposits if deposit rates are lowered,” Vijayakumar said. However, he highlighted that rate-sensitive sectors such as automobiles and real estate stand to benefit from a rate cut.

Offering a contrarian view on lenders, Naveen Kulkarni, CIO at Axis Securities PMS, believes the worst may be over. Kulkarni expects the effect on NIMs to remain manageable and limited, noting that the impact of CRR cuts and ongoing term-deposit repricing should largely offset the yield pressure from the recent rate cut. Kulkarni asserted that despite the cut, the earnings-downgrade cycle is now behind.

For the broader industrial base, K V Srinivasan, Executive Director and CEO, Profectus Capital, noted that the rate cut, coupled with liquidity infusion, should augur well for the corporate and the MSME sectors by reducing funding costs and boosting profitability.

Borrowers win, savers adjust

For the common man, the policy easing brings tangible relief to monthly budgets. Adhil Shetty, CEO & co-founder of BankBazaar.com, breaks down the math: “For a Rs 50 lakh loan over 20 years the fall in rates can reduce lifetime interest outgo by about Rs 9 lakh.” However, he said deposit rates are likely to soften further, making it important for savers, particularly retirees, to lock into longer tenors while higher slabs are still available.

Liquidity equation

A key highlight of the policy was the announcement of Rs 1 trillion in Open Market Operations (OMO) and a $5 billion FX swap. Anil Rego, founder and fund manager at Right Horizons PMS, believes this demonstrates the RBI’s intent to counterbalance rupee pressures via liquidity support.

Rego added that the OMO purchase guidance and potential FX swaps further underscore the RBI’s intent to maintain orderly financial conditions amid global uncertainties.

Sonam Srivastava, Founder and Fund Manager at Wright Research PMS, expects bond markets to react favourably. “Bond yields should move lower with the 10-year moving toward the 6.8 to 7 per cent range as investors price in the start of an easing path,” Srivastava added.

Future outlook

Despite the optimism, experts advise caution regarding potential overheating. Garima Kapoor, Deputy Head of Research at Elara Capital, remains bullish on further easing. “We believe that there would be scope for another 25 bps cut this cycle, as inflation is expected to remain benign,” Kapoor said.

However, Divam Sharma, Co-Founder and Fund Manager at Green Portfolio PMS, warned that while the near-term impulse is positive, risks remain. “Investors should remain vigilant excess liquidity, a weak currency, and strong demand can quickly tilt the economy towards overheating if not managed carefully,” Sharma said.