17 of 20 experts back December rate cut despite GDP uptick; banks’ margins at risk

Seventeen out of 20 economists, treasury heads and fund managers polled by Moneycontrol expect the Reserve Bank of India (RBI) to cut interest rates in its December monetary policy, riding on the back of easing inflation. Consumer Price Index (CPI) inflation has remained at multi-month lows for two consecutive months, strengthening the case for monetary easing. Even as the economy grew better than expected in the September quarter (Q2FY26), respondents believe inflation dynamics will remain the primary driver for the central bank’s next rate decision. Despite the sequential uptick in GDP growth in Q2, most experts said the recent disinflationary trend offers the RBI enough comfort to support growth through a rate cut. “With a comfortable inflation trajectory in place, accompanied by robust GDP growth number expectation for Q2FY26, we are of the view that the RBI has space to cut rates further by 25 bps in the upcoming policy meeting even now,” said Ajit Banerjee, President and Chief Investment Officer, Shriram Life Insurance Company. If a rate cut happens in December, it will be the first reduction by the central bank after maintaining status quo in the last two policies. The RBI has so far reduced repo rate by 100 bps from 6.5 percent to 5.5 percent between February and June. After that, it has maintained a status quo in August and October policy. Divergent views Few economists have lowered the probability of a rate cut by the RBI in the December monetary policy to 60 percent from 65-80 percent earlier. CLSA, in its report, said that RBI’s MPC (Monetary Policy Committee) may still deliver a cautious 25 bps rate cut in the December policy, though the probability is lower now to 60 percent from 80 percent earlier. Similarly, Nomura lowered the probability of a cut to 60 percent, from 65 percent earlier, as the MPC may decide to deliver another dovish hold, even though low inflation provides the space. These estimates came after India’s economy extended its strong run for a third consecutive quarter, growing at a six-quarter high of 8.2 percent in July–September, compared with 7.8 percent in the previous quarter, helped by robust manufacturing and a buoyant services sector, especially financial, real estate and professional services. On November 28, Moneycontrol reported that India’s bond market is seeing a sharp divergence in strategy, with investors and issuers spilt over the likelihood of a rate cut by the RBI in the December policy review. Convinced that the central bank will hold rates on December 5, a section of corporate borrowers is rushing to issue bonds, locking in lower costs fearing that sticky inflation could push future borrowing costs. On the other hand, there are issuers and investors who are convinced that a rate cut is coming. Investors are demanding higher coupons in expectation of falling yields, while borrowers are choosing to delay issuance, waiting to tap the market in hopes of cheaper funds after the rate cut. This push and pull has led to uneven issuance trends and volatile pricing in the corporate bond market, reflecting deep uncertainty over the RBI’s next policy move. Impact on bank margins However, market participants cautioned that such a move could put pressure on banks’ net interest margins (NIMs), especially as deposit costs remain sticky. Treasury heads noted that lenders may find it challenging to pass on the full benefit of lower rates without hurting profitability, even as borrowers stand to gain from cheaper credit in the near term. Typically, when a rate-cut cycle begins, banks see margin pressure as lending rates, especially those linked to the repo rate adjust downward more quickly than deposit rates. This faster transmission on the lending side compresses NIMs for banks. During their second-quarter earnings announcements and press conferences, several bankers had expressed confidence that NIMs would stabilise in the third quarter of the current financial year. This optimism was largely based on the earlier assumption that there would be no immediate rate cut by the RBI.