**EDS: THIRD-PARTY IMAGE** In this screenshot from a video posted on December 5, 2025, Reserve Bank of India (RBI) Governor Sanjay Malhotra speaks as he announces the fifth bi-monthly monetary policy for the current fiscal in Mumbai. (@reservebankofindia593/X via PTI photo) (PTI12_05_2025_000036B) | Photo credits:-
Does the lower inflation forecast leave more room to support growth?
As to whether there is more room in the future (to lower the repo rate), we are neutral today. We believe that the most important thing is that inflation has been benign. Over the past two years, this percentage has been around 3 to 3.5 percent, if you ignore the food component, which was volatile. And also in the future: if you exclude gold and silver, we expect it to remain favorable. Or whether the policy opens up to further interest rate cuts – that will be speculation. The most important thing now is that we have reduced the repo rate even further by 25 basis points (bps). We need to focus on transmission. Given that inflation is expected to be favorable, I think we need to first push it into the real economy. Then we will see how the growth and inflation dynamics will behave and we will make decisions policy by policy.
Is the rupee undervalued? What is the RBI’s approach to a depreciating currency?
Our policy has always been that we do not focus on price levels or bandwidths. We let the markets determine prices. Markets are efficient in the long run. We saw this earlier in February, when the rupee rose to almost ₹88 per US dollar, only to fall back below ₹84 within three months. These fluctuations and volatility can therefore occur. Our effort has been and will continue to reduce abnormal or excessive volatility. Our external position is very strong. Going forward, we believe that we will have sufficient reserves, that the current account deficit will be very manageable, and that we will have good capital flows given strong fundamentals. So in terms of the external sector, we are in a very comfortable position.
Isn’t consumer demand picking up, leading to such a low level of inflation?
0.2 percent is not the right inflation level. We aim for 4 percent. At the same time, I don’t think we should look at 0.2 percent because there will be fluctuations and volatility in the markets – whether in currencies, shares or prices in general. Some effects are also due to base effects. Previously we had very high food inflation and because of the base effect it now appears to be low. But underlying inflation is certainly on the low side and that is why we have chosen to lower the repo rate.
Will banks cut deposit rates after the repo cut?
We have to look at real interest rates; when inflation is this low, it will remain low in the future. Even though nominal interest rates may seem low today, real interest rates are quite high. This applies not only to borrowers, but also to savers. So we expect that after today’s repo cut, deposit rates will moderate to some extent.
Is the RBI knowingly repatriating physical gold stored abroad to India?
We are diversifying. It is not good to store all the gold in one place.
Interest rates on new rupee loans have increased. Bond yields have also not fallen to the same extent as repo bonds. Is transfer a challenge?
On the credit side, interest rates have increased over the past two months. As mentioned, the interest rate effect now amounts to 79 basis points.But if the share of loans with a higher interest rate, such as unsecured loans and gold loans, increases, the average interest rate goes up. This does not mean that transmission has slowed down. The number to look at is the interest rate effect – whether or not interest rates have fallen for different segments of loans. As the share of higher-yielding loans rises, the average interest rate rises, even though interest rates for each segment have fallen.
When it comes to bond yields, the primary target we have is our operating target, and that then feeds into various other interest rates, including bond yields. If you compare today’s bond yields with those of the past and the spreads, they are more or less comparable. The spreads are not higher. Keep in mind that when the policy rate is lower, the spread will be higher. You cannot expect the same spread at a repo rate of 6.50 percent and a repo rate of 5.50 to 5.25 percent. If you look at spreads historically when the repo rate was 5 to 5.15 percent, spreads today are not much different; they may have been slightly lower on average than before. Bond yields follow the long-term policy interest rate path. That is one factor, but it is mainly about supply and demand. Previously, we had created oversupply through OMOs, causing interest rates to fall.
Published on December 5, 2025
#focus #transmission #policy #rate #cuts #RBI #Governor