Why 2025 saw the biggest Central bank easing in over a Decade?

SYNOPSIS

2025 was a landmark year for global monetary policy when central banks made a clear and sharp move from tightening to easing. Faced with gradually declining inflation and weakening economic momentum, central banks embarked on the most aggressive cycle of interest rate cuts in over a decade. The Reserve Bank of India responded in a similar fashion to these global developments and implemented a slew of monetary and liquidity measures to bolster growth, calm financial markets and facilitate smooth transmission of policy.

A sharp global shift toward monetary easing defined 2025, as central banks cut interest rates to revive growth amid easing inflation.

Global Central Banks Lead Major Easing Effort

In 2025, global central banks collectively, cut interest rates at the fastest pace since the global financial crisis. Nine major central banks that influence the most heavily traded currencies, including the Federal Reserve, the European Central Bank and the Bank of England, made a series of rate cuts which when combined amounted to approximately 850 basis points of reductions across 32 policy actions. This was the biggest single, year easing in more than ten years. The central banks in the emerging markets were even bolder in their stance and they have cut interest rates by over 3, 000 basis points in total across various moves. Turkey, Russia, Mexico, and India were leading the cutting campaign among emerging market countries, and they have done so in response to the more obvious signs of easing inflation and weaker economic indicators.

The decision to loosen policy was largely due to the risk reassessment of the broad economy; central banks have shifted focus from inflation control to supporting economic growth and financial stability. They reversed their stance after the sharply tightening in 2022 -2023 when policymakers were trying to counter inflation caused by the upward movement of energy prices and global disruptions. It is worth noting that not all economies took the same direction. A few, for example, Japan, raised interest rates in 2025 because of localized inflationary pressures and this is proof that monetary policy decisions are still very much dependent on domestic factors even though global trends are moving towards convergence.

RBI’s Monetary Policy Actions in 2025

India's monetary policy was accommodative throughout 2025 as the Reserve Bank of India kept adapting its stance according to domestic economic conditions. The Reserve Bank of India has gradually reduced its repo rate by 125 basis points during the year, which is indicative of a policy stance aiming at economic revival in the wake of a stable inflationary environment.Besides the interest rate cuts, the central bank took proactive liquidity measures to keep the financial conditions easy. At the year's end, the RBI revealed its intention to infuse around 2.9 lakh crore into the banking system through a mix of government bond purchases and a long, term foreign exchange swap deal. Such a large liquidity injection was aimed at relieving tight cash conditions, facilitating credit flows, and stabilizing the bond markets, especially as the cost of funds had been rising earlier in the season.

Policy Transmission and Market Impact

The combined effect of rate cuts and liquidity injections made monetary policy transmission more effective, thus contributing to the reduction of borrowing costs for businesses and households.Liquidity support by way of open market operations and swaps was aimed at ensuring that financial intermediaries had enough funds to be able to continue the flow of credit to the whole economy. These measures were consistent with the RBI's neutral policy stance and its focus on stabilizing domestic demand while keeping inflation within the target range.The data pointed to consumer prices being largely under control, which was in line with the RBI's decision to keep an accommodative stance and support monetary conditions.

Conclusion

Both global and Indian monetary authorities may start fine, tuning their policy in 2026. After a year that was characterized mostly by broad easing, the emergence of a few economies where policies might be tightened and the necessity to trade off growth against inflation risks could be the determinants of central bank decisions next year. The focus for India will probably stay on providing easy liquidity conditions, good credit transmission and sound macroeconomic management. The year 2025 can be characterized as a period when central banks turned to support and stability, India central bank being instrumental in this monetary policy shift.

DEVIN JAIN