The Reserve Bank of India’s Monetary Policy Committee on Friday cut the repo rate by 25 basis points to 5.25%.

The repo rate is the interest rate at which the central bank lends money to commercial banks. The Monetary Policy Committee reviews the rate every two months.

The committee had kept the repo rate unchanged at 5.5% in both August and October. In June, it had cut the rate by 50 basis points from 6% to 5.5%, following reductions of 25 basis points each in April and February.

A basis point is one-hundredth of a percentage point. Basis points are used to describe the percentage change in the value of a financial instrument.

Central banks usually reduce repo rates to stimulate economic growth by making borrowing cheaper for individuals and businesses. This translates to lower equated monthly instalments for borrowers.

On Friday, Reserve Bank of India Governor Sanjay Malhotra said that the Monetary Policy Committee had also decided to maintain its monetary policy stance as “neutral”.

A neutral stance means that the Reserve Bank remained flexible in adjusting policy rates based on prevailing economic conditions.

The policy review comes amid strong economic performance, with the country’s gross domestic product growing at 8.2% in the second quarter of the financial year. This marked the fastest pace in six quarters.

Malhotra noted that merchandise exports contracted year-on-year in October, while imports rose for the second straight month, widening the trade deficit.

However, strong services exports, remittances and robust foreign investment flows were expected to keep the current account deficit modest, the central bank governor said.

Inflation forecast lowered to 2%

The Monetary Policy Committee on Friday also lowered its inflation forecast for the financial year 2025-’26 to 2%, down from the earlier 2.6%, citing a correction in food prices.

The quarter-wise estimates for the next financial year indicate a persistent fall in prices, with inflation projected at 3.9% for the first quarter, before rising to 4.0% in the second quarter.

The central bank also revised its GDP forecast for the current year upward to 7.3% from the earlier estimate of 6.8%.

The development comes against the backdrop of a weakening rupee, which breached the Rs 90 mark against the United States dollar on Wednesday.