RBI may cut repo rate by 25 basis points in December, says Morgan Stanley

The Reserve Bank of India (RBI) is expected to reduce the repo rate by 25 basis points in its December 2025 monetary policy meeting, according to a report by Morgan Stanley, a major global financial services firm known for its research and analysis on markets and economies. If the cut happens, the repo rate will fall to 5.25%.

Morgan Stanley says the rate cut is likely because inflation in India has been lower than expected. The Consumer Price Index (CPI), which measures the rise in prices, has been below forecasts. This gives the RBI room to make borrowing cheaper. The central bank is expected to take a cautious, data-driven approach after the cut, observing how the economy responds before making further decisions.

The repo rate is the interest rate at which the RBI lends money to commercial banks. When the repo rate is lowered, banks can borrow money more cheaply, which often allows them to reduce interest rates on loans for homes, cars, and business investments. Lower rates encourage spending, investment, and economic growth.

However, lowering the repo rate may also have some side effects. Cheaper loans can increase demand for goods and services, which may push prices up if supply does not keep pace. Lower rates may make Indian investments less attractive to foreign investors, potentially weakening the rupee. Additionally, higher borrowing and spending could sometimes overheat the economy if demand exceeds production capacity. The RBI monitors these risks carefully to maintain balance.

The report also noted that the government is expected to stay fiscally prudent, focusing on gradually reducing the fiscal deficit while continuing capital expenditure. These measures aim to support economic growth without putting extra pressure on prices.

Regarding inflation, Morgan Stanley expects headline CPI to rise slightly in 2026-27, aligning with the RBI’s medium-term target of 4%. Food prices may fluctuate due to weak base effects, while core inflation (excluding food and fuel) is expected to remain stable. Both food and core inflation are projected to converge around 4-4.2%, keeping consumer expectations steady.

India’s external finances are expected to remain strong. The current account deficit is likely to stay at or below 1% of GDP, supported by healthy foreign exchange reserves, low external debt, and adequate import cover, providing a buffer for macroeconomic stability.

In short, a repo rate cut in December would make borrowing cheaper, support growth and investment, and help the economy recover, while the RBI remains cautious about possible side effects like higher prices, a weaker rupee, or excess demand, balancing stimulus with stability.