Why in News?

At its meeting held over December 3-5, 2025, the Reserve Bank of India‘s six-member Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra, announced its decision on December 5. The committee cut the policy repo rate while keeping the stance neutral, against a backdrop of unusually soft inflation and firm growth.

The MPC voted unanimously (6-0) to lower the policy repo rate by 25 basis points to 5.25% — the lowest in over three years — citing headline retail inflation near a record low and resilient domestic activity.

• Repo rate cut 25 bps to 5.25%; the SDF at 5.00% and the MSF and Bank Rate at 5.50%.
• Stance retained at neutral (data-dependent, no preset bias to cut or hike).
• Takes the cumulative 2025 easing to about 125 bps.
• Drew on a sharp inflation fall — combined CPI was a record-low 0.25% in October 2025, ticking up to 0.71% in November.
• FY26 real GDP growth retained around 7.3%; FY26 CPI projected near 2.0%.
• Governor Malhotra described the mix of benign inflation and ~8% first-half growth as a rare Goldilocks phase.

The development matters in the context of:

• Why it matters: the repo rate is the RBI’s principal policy lever, transmitting to EMIs, deposit and lending rates, and bond yields.
• It anchors India’s flexible inflation targeting regime — a 4% target with a 2-6% tolerance band, statutorily fixed under the amended RBI Act.
• A near-zero CPI print is itself a policy puzzle, raising questions about deflation risk and the durability of the disinflation.

UPSC Relevance

Prelims Relevance

• Repo rate = the LAF overnight lending rate at which RBI lends to banks against government securities.
• SDF (Standing Deposit Facility) is the floor of the LAF corridor; MSF is the ceiling.
• Corridor symmetry: SDF = repo minus 25 bps; MSF = repo plus 25 bps.
• The MPC has six members — three from RBI (Governor, a Deputy Governor, one officer) and three external members appointed by the Centre.
• The Governor chairs the MPC and holds a casting vote in a tie.
• MPC meets at least four times a year; quorum is four members.
• Inflation target: 4% CPI with a +/- 2% band, set by the Centre in consultation with RBI every five years.
• Statutory basis: the Reserve Bank of India Act, 1934, amended in 2016 via the Finance Act to create the MPC.
• A failure to meet the target (CPI outside 2-6% for three straight quarters) obliges RBI to report to the government.
• CRR (Cash Reserve Ratio) and SLR are reserve requirements, distinct from the policy rate.

Mains Relevance

GS Paper 3

• Monetary policy framework: instruments, the LAF corridor, and the conduct of flexible inflation targeting.
• Monetary transmission — why repo-rate changes pass through to bank lending rates with lags and frictions.
• Managing a low-inflation, firm-growth phase: balancing demand support against financial-stability and asset-price risks.

GS Paper 2

• Statutory and institutional design of the MPC — accountability, autonomy, and the government-RBI relationship in setting the inflation target.

Essay

• Price stability and growth: the trade-offs at the heart of central banking.
• Institutions and credibility — how rules-based frameworks shape economic outcomes.

Background and Context

What the December 2025 MPC decided

The headline action and the full rate corridor.

• Repo rate cut by 25 bps to 5.25%, the lowest in more than three years.
• SDF at 5.00%; MSF and the Bank Rate at 5.50% — keeping the LAF corridor symmetric.
• CRR left unchanged at 3.0% of net demand and time liabilities; SLR unchanged.
• Decision was unanimous across all six members; the stance stayed neutral.

The repo rate and the LAF corridor

Defining the central instrument of modern Indian monetary policy.

• The repo rate is the rate at which RBI lends overnight to banks under the Liquidity Adjustment Facility (LAF) against government securities (a repurchase agreement).
• It sits between two bounds: the SDF (the floor, at which banks park surplus funds with RBI without collateral) and the MSF (the ceiling, an emergency borrowing window).
• Moving the repo rate shifts the entire corridor, steering short-term money-market rates toward the policy rate.
• A cut lowers banks’ cost of funds, intended to feed through to cheaper loans and revive demand.

Flexible inflation targeting framework

The legal mandate that governs every MPC decision.

• Since 2016, India follows flexible inflation targeting under the amended RBI Act, 1934.
• The Centre, in consultation with RBI, sets the target every five years — currently 4% CPI with a 2-6% tolerance band.
• “Flexible” means the RBI also weighs growth while pursuing price stability, rather than targeting inflation rigidly.
• If CPI stays outside 2-6% for three consecutive quarters, it is treated as a failure and RBI must report the reasons and remedial steps to the government.
• CPI (combined), compiled by the National Statistical Office, is the nominal anchor — not WPI.

Composition and mandate of the MPC

Who decides, and how the rule-based body is structured.

• The MPC has six members: the Governor (chair), a Deputy Governor in charge of monetary policy, one RBI officer, and three external members appointed by the Centre.
• Each member has one vote; in a tie the Governor casts a second, deciding vote.
• It must meet at least four times a year, with a quorum of four; minutes and the vote split are published.
• The December panel under Governor Sanjay Malhotra included external members Nagesh Kumar, Saugata Bhattacharya and Ram Singh, with Poonam Gupta (Deputy Governor) and Indranil Bhattacharyya from RBI.

The data that drove the cut

Inflation at record lows alongside robust output.

• Combined CPI inflation fell to 0.25% in October 2025 — the lowest in the current series — before edging up to 0.71% in November, well under the 4% target.
• The softness was led by a sustained decline in food prices, helped by a favourable monsoon and the GST rationalisation effects feeding through.
• Growth held firm, with the economy expanding around 8% in the first half of FY26.
• RBI projected FY26 real GDP near 7.3% and FY26 CPI close to 2.0%, leaving room to support demand without breaching the mandate.

Monetary transmission and limits

Why a rate cut does not act instantly or fully.

• Transmission is the pass-through of policy-rate changes to deposit and lending rates and, ultimately, to spending and investment.
• Banks reprice External Benchmark Lending Rate (EBLR) loans quickly, but legacy MCLR-linked loans adjust with lags.
• Surplus liquidity, competition for deposits, and the credit cycle all shape how much of a cut reaches borrowers.
• The neutral stance signals the RBI will stay data-dependent, watching whether disinflation and growth hold before acting again.

Way Forward

Watch the data, not the calendar

• Track the durability of low food inflation and any reversal in core prices before the next move.
• Guard against reading near-zero prints as durable deflation versus a temporary, base-effect-driven dip.

Strengthen transmission

• Keep liquidity adequate so the rate cut reaches borrowers via EBLR and deposit repricing.
• Monitor financial-stability risks — asset prices and unsecured credit — that low rates can fuel.

With inflation comfortably inside the band and growth firm, the calibrated cut keeps policy supportive while preserving optionality; communication and credible data will matter more than the size of any single move.

Conclusion

The December 2025 cut to 5.25% caps a year of substantial easing, framed by the RBI as a once-rare alignment of soft inflation and strong growth.

By holding a neutral stance, the MPC signals it is supporting demand without committing to a path — a textbook expression of flexible inflation targeting under the amended RBI Act.

For UPSC, the episode is a clean case study of the policy-rate instrument, the LAF corridor, the inflation-targeting mandate, and the institutional design of the MPC.

UPSC Practice Questions

Prelims MCQ 1

With reference to India’s monetary policy framework, consider the following statements:

1. The Monetary Policy Committee has six members, of whom three are appointed by the Central Government.
2. The inflation target of 4% with a +/- 2% band is fixed by the Reserve Bank of India alone.
3. The Standing Deposit Facility rate forms the floor of the liquidity adjustment facility corridor.

How many of the above statements are correct?

(a) Only one (b) Only two (c) All three (d) None

Answer: (b) Only two

Explanation:

Statements 1 and 3 are correct. The target is set by the Central Government in consultation with the RBI (not by RBI alone), so statement 2 is wrong. The SDF is the corridor floor; the MSF is the ceiling.

Prelims MCQ 2

Which of the following statements about the repo rate is most accurate?

(a) It is the rate at which banks lend to the RBI without collateral. (b) It is the rate at which the RBI lends overnight to banks against government securities under the LAF. (c) It is the proportion of deposits banks must keep as cash reserves with the RBI. (d) It is the long-term rate at which the RBI rediscounts bills of exchange.

Answer: (b) It is the rate at which the RBI lends overnight to banks against government securities under the LAF.

Explanation:

The repo rate is the LAF overnight lending rate against G-secs. Option (c) describes the CRR; (d) loosely describes the Bank Rate; (a) is incorrect for the repo.

UPSC Mains Questions

1. Discuss the instruments and institutional design of India’s flexible inflation-targeting framework. How does a 25-basis-point repo-rate cut transmit through the economy, and what factors weaken that transmission?
2. A period of record-low inflation alongside firm growth poses distinct challenges for a central bank. Examine the trade-offs the Monetary Policy Committee must weigh in such a phase, and the case for a neutral stance.

Sources: Reserve Bank of India and Business Standard.

Frequently Asked Questions

Why in News?

By December 2025, India’s operational renewable-energy capacity has crossed the 200 GW mark, a structural milestone in the country’s power mix. Reporting collated by the Ministry of New and Renewable Energy (MNRE) data and current-affairs trackers puts installed renewables at about 201.45 GW, with solar the single largest contributor.

The headline fact: non-fossil sources now make up close to half of India’s total installed generation capacity, putting the country well ahead of the timeline implied by its 2030 Nationally Determined Contribution (NDC) for non-fossil power.

• Renewable-energy installed capacity stands at about 201.45 GW out of a total installed capacity of roughly 452.69 GW.
• Solar leads with about 90.76 GW, followed by wind (~47.36 GW), large + small hydro (~51.99 GW) and bio-power (~11.32 GW).
• Non-fossil sources are about 46% of installed capacity, near the half-way mark.
• India is the third-largest solar power producer globally, after China and the United States.
• Leading states include Rajasthan, Gujarat, Tamil Nadu and Karnataka, which host most utility-scale capacity.

The development matters in the context of:

• It matters because India’s Panchamrit pledge at COP26 set a target of 500 GW non-fossil capacity by 2030 — the 200 GW renewable milestone is a checkpoint on that path.
• It matters because non-fossil capacity is the supply-side anchor of India’s net-zero-by-2070 commitment and its energy-security strategy against imported fuel.

UPSC Relevance

Prelims Relevance

• Installed capacity is the rated power a plant can produce, not the energy it actually generates; renewables have lower capacity utilisation factors (CUF) than thermal plants.
• Non-fossil sources = solar + wind + hydro + nuclear + biomass; renewable energy excludes large hydro in some older definitions.
• India’s NDC (2022 update): cut emissions intensity of GDP by 45% from 2005 levels by 2030; reach about 50% non-fossil installed capacity by 2030.
• Panchamrit targets (COP26, Glasgow, 2021): 500 GW non-fossil capacity and 50% energy from renewables by 2030; net-zero by 2070.
• National Solar Mission (Jawaharlal Nehru National Solar Mission), launched 2010, part of the National Action Plan on Climate Change (NAPCC).
• PM-Surya Ghar: Muft Bijli Yojana — rooftop-solar scheme for households launched in 2024.
• PM-KUSUM — solarises agricultural pumps and supports farmer solar capacity.
• PLI scheme for solar PV modules targets domestic manufacturing of high-efficiency modules.
• Bhadla (Rajasthan) and Pavagada (Karnataka) are among the world’s largest solar parks.
• Green Energy Corridor (GEC) builds transmission to evacuate renewable power from generation-rich states.

Mains Relevance

GS Paper 3

• Assess India’s progress on renewable-energy targets and the technical challenges of integrating variable solar and wind into the grid.
• Examine energy security and the role of domestic manufacturing (PLI) in reducing import dependence for solar modules and cells.

GS Paper 2

• Evaluate India’s international climate commitments (NDC, Panchamrit) and how domestic policy delivers on multilateral pledges.

Essay

• Powering a billion aspirations: India’s energy transition between growth and the climate clock.
• From fossil dependence to a non-fossil future: the politics and economics of clean power.

Background and Context

What the 200 GW milestone actually counts

The figure is installed renewable capacity, and reading it correctly matters for Prelims and Mains.

• Total renewable capacity is about 201.45 GW; total installed generation capacity (all fuels) is roughly 452.69 GW.
• Solar (~90.76 GW) is now the largest renewable source, overtaking hydro and wind.
• Adding nuclear to renewables gives the wider non-fossil basket, which is near 46% of installed capacity.
• Capacity is not generation: because solar and wind have lower capacity utilisation factors, their share of electricity actually generated is smaller than their share of capacity.

The policy architecture behind the surge

A stack of missions and incentives, built over fifteen years, produced this capacity.

• The National Solar Mission (2010), under the National Action Plan on Climate Change, seeded large-scale solar deployment and falling tariffs.
• PM-Surya Ghar: Muft Bijli Yojana pushes household rooftop solar, widening generation beyond utility-scale parks.
• PM-KUSUM solarises farm pumps, linking clean energy to rural livelihoods and the agriculture sector.
• The PLI scheme for solar PV modules targets domestic, high-efficiency manufacturing to cut reliance on imported cells and modules.
• 100% FDI under the automatic route and the Green Energy Corridor for transmission round out the enabling framework.

Where the capacity sits

Renewable capacity is geographically concentrated, which shapes the grid challenge.

• Rajasthan (~29.98 GW) and Gujarat (~29.52 GW) lead, on the back of strong solar and wind resources.
• Tamil Nadu (~23.70 GW) and Karnataka (~22.37 GW) follow, with mature wind and solar fleets.
• Mega solar parks like Bhadla in Rajasthan and Pavagada in Karnataka anchor utility-scale output.
• Concentration in a few resource-rich states makes inter-state transmission and evacuation the binding constraint.

How it maps to India's climate commitments

The milestone is best read against the targets India put on the table at Glasgow.

• At COP26 (2021), the Panchamrit pledge set 500 GW non-fossil capacity and 50% of energy from renewables by 2030.
• India’s updated NDC (2022) commits to reducing the emissions intensity of GDP by 45% from 2005 levels by 2030.
• The non-fossil share near 46% puts India ahead of the implied glide path well before 2030.
• All of this nests inside the long-term goal of net-zero by 2070 announced at the same summit.

The hard part: integration and intermittency

Adding green megawatts is the easier half; running a stable grid on them is the harder one.

• Solar and wind are variable — output swings with sunlight, cloud and wind speed, straining grid balancing.
• Energy storage (battery and pumped hydro) is still small relative to the renewable build-out, limiting round-the-clock supply.
• Discoms’ weak finances and payment delays raise the cost of contracting new renewable capacity.
• Land acquisition and module-supply bottlenecks slow large parks, even as tariffs stay low.

Energy security and the manufacturing question

Clean power is also a strategic and industrial story, not only a climate one.

• Scaling renewables cuts exposure to imported coal, oil and gas and the foreign-exchange burden that comes with them.
• A heavy reliance on imported solar cells and modules, much of it from a single source country, is itself a vulnerability.
• The PLI scheme and Approved List of Models and Manufacturers aim to localise the value chain.
• Clean-energy manufacturing ties the transition to jobs, exports and Atmanirbhar Bharat goals.

Way Forward

Build the grid and storage, not just the plants

• Accelerate transmission corridors and inter-state evacuation so generation-rich states can export surplus.
• Scale battery storage and pumped hydro to firm up variable solar and wind and enable round-the-clock supply.

Fix the demand side and the discoms

• Strengthen discom finances so renewable contracts are bankable and payments are timely.
• Expand rooftop solar uptake under PM-Surya Ghar with simpler net-metering and financing.

Deepen domestic manufacturing

• Use the PLI scheme to localise cells, modules and emerging technologies, reducing import dependence.
• Build skills and supply chains for green hydrogen and storage as the next frontier.

Conclusion

Crossing 200 GW of renewable capacity, with non-fossil sources near half of installed power, marks a genuine structural shift in how India makes electricity — and signals that its 2030 climate targets are within reach ahead of schedule.

The harder work now moves downstream: storage, transmission, discom health and domestic manufacturing. Capacity has been built; the task is to turn it into reliable, affordable, round-the-clock clean power that also secures India’s energy independence.

UPSC Practice Questions

Prelims MCQ 1

With reference to India’s renewable-energy capacity, consider the following statements:

1. Solar is the largest single source within India’s installed renewable-energy capacity.
2. Installed capacity and actual electricity generated are the same measure.
3. India is among the top three solar power producers in the world.

How many of the above statements are correct?

(a) Only one (b) Only two (c) All three (d) None

Answer: (b) Only two

Explanation:

Solar is the largest renewable source and India ranks third in solar globally, so statements 1 and 3 are correct. Statement 2 is wrong: installed capacity is rated power, while generation depends on the capacity utilisation factor, which is lower for solar and wind.

Prelims MCQ 2

The ‘Panchamrit’ targets, central to India’s energy-transition framing, were announced at which forum?

(a) G20 Summit, New Delhi (b) COP26 climate summit, Glasgow (c) International Solar Alliance founding summit (d) UN General Assembly, New York

Answer: (b) COP26 climate summit, Glasgow

Explanation:

India announced the five ‘Panchamrit’ commitments — including 500 GW non-fossil capacity by 2030 and net-zero by 2070 — at the COP26 summit in Glasgow in 2021.

UPSC Mains Questions

1. India’s installed renewable capacity has crossed 200 GW, with non-fossil sources nearing half of total capacity. Examine the achievements and the integration challenges of this energy transition for grid stability and energy security.
2. Domestic manufacturing is increasingly seen as central to a credible clean-energy transition. Critically evaluate the role of schemes such as the PLI for solar modules in reducing India’s import dependence.

Sources: Ministry of New and Renewable Energy (MNRE) and Khan Global Studies Current Affairs.

Frequently Asked Questions