In its December 2025 policy meeting, the Reserve Bank of India’s Monetary Policy Committee (MPC) delivered a widely anticipated but impactful policy action, cutting the repo rate by 25 basis points to 5.25% from 5.50%. The vote was unanimous in favour of the rate reduction, while the stance remained neutral, supported by a 5–1 majority. The lone dissent came from Prof. Ram Singh, who advocated for a shift to an accommodative stance, pointing to a fast-softening inflation trajectory and improving growth conditions.
What stood out in this policy review was not merely the rate adjustment, but the sharp recalibration of liquidity strategy and an explicit messaging change from the central bank that may shape markets well into 2026.
A Strong Liquidity Push Signals Commitment to Transmission
Beyond the rate cut, the RBI announced an assertive liquidity infusion plan. The central bank will execute a ₹1 trillion OMO purchase alongside a USD/INR buy-sell swap worth USD 5 billion, both targeted for completion within December. Together, these actions inject an estimated ₹1.45 trillion of durable liquidity into the financial system.
This two-pronged approach—combining domestic bond purchases with FX operations—ensures smoother transmission of policy easing and addresses funding pressures at a systemic level. Money market volatility has been elevated over the last few quarters, and this infusion is expected to anchor short-term rates closer to the policy rate, easing borrowing costs for banks, NBFCs and corporates.
Inflation Glides Lower, Allowing Policy Flexibility
A major driver behind the MPC’s decision was the remarkable softening in inflation. With food prices remaining unusually benign, the central bank sharply revised downward its inflation projections:
- FY26 CPI forecast lowered to 2% (from 2.6%)
- Q1 FY27 CPI at 3.9%
- Q2 FY27 CPI at 4%
This is accompanied by an optimistic revision to growth: FY26 GDP is now expected at 7.3%, up from the earlier 6.8% projection.
The combination of softer inflation and resilient growth provides the MPC enough room to prioritize financial conditions and liquidity management without worrying about immediate inflationary spillovers. The consistent moderation in core inflation, averaging 3.2% in 2025 (excluding precious metals), reinforces the view that domestic demand remains steady but not overheated.
RBI Decouples the Rupee Narrative from Monetary Policy
One of the most notable policy signals was the central bank’s rejection of the widely held belief that INR depreciation necessitates monetary tightening. The RBI clarified that the recent weakening of the rupee has less to do with domestic fundamentals and more with external factors—including U.S. trade uncertainty and global equity reallocations toward AI-focused emerging markets such as China, South Korea and Taiwan.
This communication marks a meaningful evolution in India’s policy framework. By decoupling FX dynamics from rate decisions, the RBI has emphasized that inflation and domestic growth conditions—not currency movements—will drive policy choices, aligning India with global best practices in inflation-targeting regimes.
A Likely End to the Easing Cycle—But Not to Accommodation
While today’s cut may represent the terminal move of this easing cycle, the underlying policy direction remains supportive. With inflation expected to rise modestly in the second half of FY27 due to base effects, the space for further cuts may be limited. However, the thrust of RBI communication suggests a “lower for longer” rate regime, aided by positive liquidity conditions.
The emphasis now shifts from headline policy rates to liquidity management tools, including OMOs and FX operations, which will guide actual market interest rates.
Market Implications: Yield Curve Flattening Ahead
The liquidity measures are poised to compress sovereign term spreads, particularly in the 3–7-year segment, where spreads have widened significantly through the easing cycle—from about 40 bps to nearly 90 bps. A reversal of this steepening is expected as OMOs push yields closer to the overnight rate.
Money market rates should also soften, reducing funding volatility for financial institutions. With more predictable liquidity, spreads in high-quality corporate bonds are likely to tighten as investor confidence improves and offshore borrowing becomes more attractive.
Portfolio Strategy: Short-to-Medium Duration Takes Center Stage
In a landscape defined by low rates and surplus liquidity, the risk–reward balance shifts decisively toward short- to medium-duration debt strategies:
- Short Duration and Corporate Bond Funds
For investors with a horizon of 12 months or more, the 1–5-year segment offers attractive carry and roll-down opportunities. These strategies stand to benefit as the curve flattens and spreads compress.
- Debt + Arbitrage Fund-of-Funds
Investors with a 2+ year horizon may consider hybrid debt–arbitrage structures that offer tax-efficient returns with reduced duration risk.
- Long Duration
Though long-duration bonds may still deliver gains, the payoff is contingent on renewed demand from insurers and pension funds—currently lukewarm—which makes this bucket relatively less compelling.
Conclusion
The December 2025 MPC meeting marks a pivotal moment for India’s monetary policy trajectory. A well-signaled rate cut, combined with decisive liquidity measures, positions the economy for stable growth and fosters a predictable interest rate environment. The RBI’s commitment to monetary transmission, its data-driven approach to inflation, and its nuanced handling of currency dynamics collectively set the stage for a prolonged period of supportive financial conditions.
For investors and market participants, the message is clear: India is entering a lower-for-longer rate environment, and the most compelling opportunities lie in the short to medium end of the yield curve
Market this week
| 01st Dec 2025 (Open) | 05th Dec 2025 (Close) | %Change | |
| Nifty 50 | ₹ 26,326 | ₹ 26,186 | -0.5% |
| Sensex | ₹ 86,066 | ₹ 85,712 | -0.4% |
Source: BSE and NSE
- Indian equity benchmarks finished the week largely unchanged, as volatility persisted despite a sharp rebound on Friday following the RBI’s surprise rate cut and upgraded FY26 GDP outlook to 7.3% alongside softer inflation projections.
- Sector performance was mixed: Consumer Durables, Defence, Media, and Capital Markets declined around 2% each, while PSU Banks, Healthcare, Realty, and Oil & Gas sectors also posted moderate losses of 1–1.5%.
- On the positive side, IT stocks outperformed with gains of about 3.5%, supported by global tech strength, while Metal and Auto indices saw marginal advances of roughly 0.5% each.
- Foreign institutional investors continued their selling streak, offloading equities worth over ₹10,400 crore, whereas domestic institutions absorbed the pressure with net purchases of nearly ₹19,800 crore.
- The Indian rupee weakened further during the week, breaching the 90-per-dollar mark for the first time and hitting a record low of 90.42 before partially recovering to settle at 89.99; the currency traded within a wide band of 89.42–90.42
Weekly Leaderboard
| NSE Top Gainers | NSE Top Losers | ||||
| Stock | Change (%) | Stock | Change (%) | ||
| Wipro | ▲ | 4.2% | HUL | ▼ | -5.2% |
| HCL Technologies | ▲ | 3.6% | Eternal | ▼ | -2.6% |
| Infosys | ▲ | 3.6% | Titan | ▼ | -2.4% |
| Tech Mahindra | ▲ | 3.5% | Apollo Hosp | ▼ | -2.0% |
| Asian Paints | ▲ | 3.3% | Reliance Industries | ▼ | -1.7% |
Source: BSE
Stocks that made the news this week:
InterGlobe Aviation (IndiGo):
IndiGo shares recovered from early losses after the DGCA relaxed certain pilot rest regulations that had contributed to widespread flight cancellations. The aviation regulator allowed airlines to use leave in place of weekly rest, aiming to stabilise crew schedules amid operational disruptions. The decision, effective immediately, was taken following representations from carriers seeking flexibility to maintain continuity in operations.
British American Tobacco – ITC Hotels Stake Sale:
British American Tobacco reduced its investment in ITC Hotels by selling a 9% stake for roughly ₹3,800 crore, lowering its holding to 6.3%. The stake originated from ITC Ltd’s hotel business demerger earlier this year, and BAT has been working to trim non-core assets and strengthen its balance sheet. The company’s leadership noted that the hotel stake did not align with its strategic priorities, making the divestment a logical step.
Indian IT Stocks – Fed Rate Cut Hopes:
Shares of major Indian IT firms advanced for a third straight session, lifting the Nifty IT index as investors priced in rising odds of a U.S. Federal Reserve rate cut. Expectations of a potential quarter-point reduction at the December FOMC meeting have improved sentiment toward export-oriented tech companies. As a result, the Nifty IT index gained nearly 0.8%, emerging among the day’s strongest performers.
