RBI MPC faces tough call on rate cut decision

Amidst a falling rupee and contrasting economic data, the job of the Reserve Bank of India’s Monetary Policy Committee (MPC) seems to be becoming more challenging. While retail inflation has been at a record low and the economy grew at a higher than anticipated 8.2% in the second quarter of the fiscal year, more recent high-frequency data for October are showing a more sobering trend. Meanwhile, the rupee has fallen to a record low and is nearing 90 against the US dollar, making it a more challenging job for the MPC. Most analysts and experts are of the view that the MPC, headed by Reserve Bank of India Governor Sanjay Malhotra, is likely to go in for another 25-basis-point rate cut this fiscal year, but whether it will be done at the upcoming policy review is to be seen. The six-member MPC will meet from December 3 to December 5 to decide on key rates and take stock of the current economic situation. The Reserve Bank of India has already cut rates by 100 basis points this fiscal but has left them unchanged since the meeting of the MPC in August. “This will be a touch-and-go policy for the RBI. This policy can go either way. There are adequate reasons to believe that a policy rate cut is warranted – especially as Headline CPI is at sub-2% levels and is likely to remain so in the next 3-4 months. On the other hand, growth has been surprising on the higher side with Q2FY26 at 8.2% while high-frequency data for October suggest expansion to have continued in both manufacturing and services, supported by GST cuts, monetary policy easing, festive demand, etc. Having said some of the recently announced data prints, such as Manufacturing PMI and IIP, are on the lower side,” said a report by Yes Bank economists Indranil Pan and Khushi Vakharia. While growth can face headwinds in quarters ahead as the festive demand gets eroded and as the Centre’s capex comes down, retail inflation is expected to rise on the back of base effects. “Our view: RBI should stay on a pause and keep stance at “neutral” to retain its firepower in the event of any growth slump,” the report said. Bank of Baroda also expects that the RBI’s MPC is likely to keep the repo rate unchanged at 5.50% and maintain a neutral stance in the December 2025 meeting. “Strong GDP growth and easing inflation give RBI room to pause rates as it monitors global uncertainties,” said Aditi Gupta, Economist, Bank of Baroda. A report by Emkay Global Financial Services said that the case for a December cut is stronger, but a split MPC cannot be ruled out. “A close call, but the RBI is likely to ease by 25bps with split MPC votes,” said the report by Emkay economists Madhavi Arora and Harshal Patel. Inflation in the second half of the current fiscal is seen to be tracking at about 130 basis points below the RBI’s estimate, and primary liquidity infusion of Rs 2 lakh crore is needed in the rest of FY26, it said. “Inflation has persistently surprised to the downside—even with noisy components like gold—while growth has consistently exceeded virtually every projection, led by a mix of cyclical forces and statistical quirks. With FY26 inflation nearing 2% and growth potentially around 7.5%, the RBI’s policy challenge is two-sided: directionally straightforward (room to ease is clear), but tactically complicated (timing the move without misreading the cycle). The RBI’s recent communication has turned noticeably softer, and while the space to cut is now openly acknowledged, the timing and forward communication remain contentious,” said the report. Retail inflation in October fell to a series low of 0.25%, which is much below the RBI’s tolerance band of 2% to 6%. While second-quarter GDP growth has been robust and full fiscal growth is now estimated at over 7%, concerns have emerged over high-frequency October data. Industrial production fell to a 14-month low of 0.4% in October from 4.6% in September, while the HSBC India Manufacturing Purchasing Managers' Index slipped to a nine-month low of 56.6 in November from 59.2 in October. There also remain concerns about the impact of the 50% tariffs by the US on Indian exports and a possible slowdown in the second half of the fiscal.