RBI may hold rates steady in December, economists split on possible cut
Hopes of an interest rate cut this week are receding—Given record low inflation and high GDP growth, the majority of economists in a Mint poll believe that the MPC may leave the repo rate untouched this week. The rest have reasons to think there will still be an interest rate cut.
The Reserve Bank of India’s (RBI's) Monetary Policy Committee (MPC) is widely expected to keep the policy rate unchanged on 5 December, even as a sizable minority of economists argues that the space created by softening inflation and moderating nominal growth warrants another rate cut.
A Mint poll of 13 economists shows nine expecting a pause, while four of them are anticipating a 25 basis points cut to 5.25%, underscoring how finely balanced the December decision is likely to be. (One basis point equals 0.01%.)
The divergence of views reflects a rare point for India’s macro economy with record-low inflation, surprisingly strong real gross domestic product (GDP) prints, weakening nominal GDP growth, and emerging external sector risks, all at once.
The MPC is scheduled to announce its policy decision after its 3-5 December meeting. The central bank is also expected to maintain its ‘neutral’ stance, which allows it to move in either direction.
Growth strong enough
For the quarter ended September, the Indian economy posted a surprising six-quarter high growth rate of 8.2%, significantly above the RBI’s 7% projection and 7.2% median estimate in a Mint poll of 15 economists. This growth was also higher than 5.6% in the same quarter last year, and 7.8% a quarter ago.
“We expect a status quo on rates on the back of strong GDP growth and the front-loading of fiscal and monetary stimulus," Anubhuti Sahay, head of India economic research at Standard Chartered Bank said. She also said that ample liquidity already in the system is likely to deliver more effective monetary policy transmission than a rate cut now.
Even as economists pointed to record low inflation in recent months contributing to the surge in real GDP growth, the high number significantly dims any expectation of a policy rate cut in December.
ICRA’s chief economist Aditi Nayar pointed to the “series-low October CPI (consumer price index) inflation print" but said that stronger-than-expected Q2 growth print above 8% makes a December cut unlikely. Bank of Baroda’s chief economist Madan Sabnavis was more categorical, stating that with growth on track and inflation expected to rise toward 4-4.5% next year, he believes “the rate cycle is ideally over."
Retail inflation in October plunged to an all-time low of 0.25%, led by a deflation in food, passthrough of GST cuts and supportive base-effects. For FY26, CPI inflation is tracking at 2.0%, lower than RBI’s estimate of 2.6%.
This resulted in higher real GDP growth, which is calculated by adjusting economic activity at current prices for inflation. Low inflation boosts real GDP growth, while high inflation pulls it down.
Liquidity constraints and banking-system stability are central to the pause narrative. “A reduction in policy rates may accelerate the shift of resources away from banks into equities and mutual funds, worsening the credit-deposit imbalance," Mandar Pitale, head of financial markets at SBM Bank India said.
Given that credit-deposit ratios are already near historic highs, the RBI would prefer to preserve liquidity buffers rather than push lending rates even lower through formal rate cuts, he said.
Economists at ICICI Bank and IDFC First Bank also see limited need for fresh easing. While ICICI Bank said that “strong domestic consumption continues to outweigh weaker exports," with growth likely to remain robust despite tariff-related headwinds, IDFC First Bank believes, “from a real-rates perspective, the space to ease is limited," given India’s still-buoyant growth and deposit mobilisation constraints.
Trade risks, external balances
A significant driver of caution is the deterioration in the goods trade deficit and uncertainty surrounding the US-India tariff negotiations. India’s goods trade deficit widened sharply to a record $41.7 billion in October, the second month after tariff escalation.
“The RBI may avoid cutting rates in order to attract interest-rate-sensitive flows and safeguard the balance of payments," Pitale of SBM Bank said.
Yes Bank also said that with consumption becoming the primary growth engine and government capex likely to moderate, the sustainability of domestic demand remains uncertain. Meanwhile, nominal GDP growth has been subdued at 8.7%, weighing on tax collections and limiting fiscal support in the second half of FY26.
Rate cut hopes still high
The four respondents expecting a 25 bps cut argue that the macroeconomic backdrop, especially inflation dynamics, makes a compelling case.
Nomura expects the repo rate to be lowered to 5.25%, assigning a 65% probability to the call.
“Inflation is likely to undershoot the RBI’s medium-term forecasts, and the forward growth outlook shows a moderation. Consistency in communication also calls for delivering a cut rather than dangling the promise of a future cut again," Nomura said in a report on 28 November.
Earlier this week, RBI governor Sanjay Malhotra said that recent economic data suggested there was still scope to cut interest rates. After rate cuts totaling 100 bps in the first half of this year, the RBI has kept rates steady since August.
Deutsche Bank also expects a 25 bps cut, adding that CPI inflation has fallen below the lower bound of the RBI’s 2-6% target.
The US Federal Reserve has continued easing monetary policy, cutting another 50 bps this year, keeping global rate differentials comfortable even with another RBI cut. With monetary transmission of earlier cuts nearly complete, Deutsche Bank believes that an incremental 25 bps reduction should be viewed as part of the broader easing cycle rather than a standalone adjustment.
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